Europe Defense: Valuations stretched but still a structural winner. In a surprising move last Friday, US President Donald Trump threatened a 50% tariff on European exports to the US as soon as 1 Jun. He has since delayed the implementation date to 9 Jul, but overall, this represents a step backwards in transatlantic trade relations. On the back of such a development, where do we stand on Europe equities?
While the macroeconomic outlook for Europe remains fraught with uncertainty, we maintain our overweight call as we see opportunities within defensive sectors such as consumer staples, utilities, and industrials. Europe’s defense sector, in particular, stands out as a structural winner, buoyed by increased geopolitical uncertainty and rising defense spending. The region is expected to allocate around 2 – 4% of its GDP to defense spending in the coming years, a marked increase from 1.3% in 2023.
Valuations for the defense sector do appear stretched given the strong rally thus far this year, however the paradigm shift in regional defense spending should result in commensurate earnings growth in the long run. To illustrate the scale of investment that the sector will enjoy, 3% of Germany’s estimated GDP in 2025 will amount to roughly EUR135bn. This sum represents an almost 70% jump from the country’s defense spending of EUR80bn in 2024. The scale of stimulus as well as permanence of the shift away from US defense subsidies will see the sector benefit in the long run.
Equity fund flows: Equity flows were subdued during the week ended 21 May as investors grappled with the US being stripped of its last triple A credit rating from Moody’s. Europe Equity funds posted their 14th inflow since mid-February, which helped to offset redemptions from US and Japan Equity Funds. On balance, Developed Market equity funds saw net inflows of just USD1.4bn. Emerging Markets equity funds posted another collective outflow during the third week of May; China led the pack with its fourth consecutive weekly outflow. Inflows to Latin America, EMEA, and India equity funds were insufficient to offset redemptions in China.
Source: Bloomberg, DBS
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