Equities: The AI and obesity rally is defying gravity

No where to hide, or what?

The stretched valuation in US equities makes us tactically go neutral against a strategically positive view on US equities. While many negative things can be said of Europe the fiscal valves are being opened and the European equity market has some catchup to do relative to US and Japanese equities so our view is that a geography rotation into Europe could happen in Q2. We maintain negative view short term on Japanese equities due to JPY risks and BoJ pivot on policy rate.

On a sector level we are positive on energy (great value and good inflation hedge), health care (strong growth relative to valuation), and financials (favourable valuation and still good operating environment). We are negative on industrials (low growth and expensive), information technology (too much speculation and hype in the short term), utilities (low momentum and negative outlook), and real estate (low momentum and expensive).

Conviction: European defence stocks as US election looms

This year is biggest election year in modern history with the US election on 5 November being the most important election and especially for Europe. Biden and Trump are polling on par for the general election in the two most recent large polls, and Trump is questioning NATO and military support for Europe, keeping European politicians anxious with a more assertive Russia.

Regardless of whether Trump wins or not his comments about NATO have set off alarm bells in Europe’s capitals and mobilized efforts to dramatically increase military spending. Poland is already spending 4% of GDP and is willing to spend more. With military spending targets presented in Europe to go well beyond 2% of GDP a lot of growth is coming “Europe first” military spending benefitting European defence companies. Rheinmetall, Germany’s largest defence company, is expected to grow revenue by at least 18% annualised over the next five years. One of our biggest convictions is European defence companies.

How can investors get exposure to defence stocks? Investors can get inspiration from our defence theme basket or check out the various ETFs such as Future of Defence UCITS ETF or VanEck Defence UCITS ETF.