In this episode, we discuss the defense industry's evolution with equity analyst Joshua Samuel. He highlights the historical underinvestment in European defense, the recent increase in defense spending, particularly Germany's program, and the strategic importance of land systems. The conversation highlights how the current geopolitical environment has transformed defense from an underperforming sector to an investment opportunity, though valuations for companies like Rheinmetall now reflect much of this potential.
Key Takeaways:
- Historical Underinvestment: European military spending dropped dramatically from 2.75% of GDP during the Cold War to approximately 1.3% over the last decade. This resulted in significant inventory reduction (77% fewer tanks, 57% fewer aircraft) and industry consolidation.
- Germany's Leadership: Germany's substantial defense spending package has garnered attention, though not all European countries have the same fiscal capacity to increase military budgets at the same rate.
- Supply Chain Constraints: Decades of underinvestment created production bottlenecks that can't be solved quickly. Companies like Rheinmetall, which maintained investment during lean periods, are well-positioned with superior production technology and cost structures.
- Investment Perspective: European defense companies offer potentially higher growth opportunities than U.S. counterparts due to the lower baseline of European defense spending and greater headroom for increases. Companies with established platforms typically present lower investment risk than those developing new technologies.
- Strategic Autonomy: With the U.S. potentially reducing its global security role, European nations are recognizing the need for self-sufficiency in defense capabilities to protect their interests and sovereignty.
Host: Rob Campbell, CFA, Mawer Director, Institutional Portfolio Manager
Guest: Joshua Samuel, CFA, Mawer Equity Analyst
This episode is available for download anywhere you get your podcasts.
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