GM QIS Podcast #5 Script
Ankit:
Hello everyone.
Thank you for joining our monthly podcast covering the challenges and opportunities in the risk premia space.
Today’s focus is our new BBVA Transatlantic Defence Thematic index.
I am your host, Ankit Gheedia, Head of QIS Research at BBVA Global Markets.
I am joined today by Santiago.
Santi, why don’t you introduce yourself?
Santi:
Thank you Ankit. I’m Santiago Mendez, an equity strategist at BBVA and one of the authors of our recently published report on Global Defence.
Q1: “So Santi, let’s start with the basics: why defence?”
Santi:
Until recently, the defence sector was a bit of a pariah in global portfolios, and particularly ESG – complex, controversial, and largely avoided. But the world has changed.
Back in 2022, when Russia invaded Ukraine, many governments woke up to a hard truth: they had underinvested in military capabilities for years. That was a turning point.
Since then, we’ve seen a seismic shift – especially in Europe. EU defence stocks have surged by roughly 320% since we first flagged the theme a few years ago. Defence is no longer a niche trade – it’s a global macro imperative.
Ankit: EU defence and banks have been absorbing a lot of US Mag-7 outflows. After Germany, 15 EU countries have sought budgetary flexibility from the EU to allocate up to 1.5% of their respective GDP to defence for a 4-year period. The change in the EU defence spending narrative seems to be comparable to COVID-era spending – essentially spend to survive.
Q2: Then why now still after such a strong performance?
[Are EU defence stocks still the best way to play the theme, after such strong outperformance?]
[Are EU defence stocks the only way to play the theme, after such strong outperformance?]
Santi:
Actually, no. While EU stocks have rallied, we can also find real value now in other geographies too, such as the US. European defence is still catching up, but it’s facing challenges – fragmented platforms, political friction, and limited production capacity.
Meanwhile, the US remains the global giant. It’s home to the world’s top defence manufacturers. And it already receives over half of Europe’s defence spending through exports.
Add to that the possibility of Donald Trump requiring NATO countries to increase their defence spending, and what you have is a likely acceleration of European military budgets – and, ironically, a boost for US defence stocks.
Ankit:
Q3: What’s in the price?
Santi:
In Europe, a lot of the rally is based on expectations. Investors are pricing in future programmes that won’t kick in until 2027 or 2028. EPS forecasts for those years are up more than 9% since December 2024.
That means investors are buying on faith – faith that governments will actually follow through with multi-year procurement.
In contrast, US defence stocks are trading at lower valuations, with record backlogs, stable earnings, and more mature execution. And yet, they’ve underperformed EU peers. This was primarily due to fears that DOGE could cut defence budgets in the US, but we think this risk is exaggerated. DOGE is mainly looking to reduce headcount by 5-8%, not cut back research programmes. Additionally, Trump is now proposing a 13% increase in defence spending for FY26, which is the highest defence budget in US history. More recently, we have also seen him striking deals with many countries: a USD142bn arms deal with Saudi Arabia, a USD96bn aircraft deal with Qatar. And India’s deal is in the pipeline…
That mispricing may not last.
Ankit
Q4: “Can Europe build their defence capabilities alone? Given what we have seen since the start of the year in terms of the transatlantic relationship – it’s a realistic question to ask, right?”
Santi:
The short answer: not yet.
Right now, Europe depends heavily on US contractors. When Russia invaded Ukraine, about 80% of Europe’s defence aid had to be sourced from outside the EU – most of it from the US.
Even today, European manufacturers are facing production delays. In Germany, defence backlogs have tripled – from 20 months to 60 months. And there are still 62 different land platforms in use across the EU. Compare that to just 8 in the US, and it’s clear: Europe isn’t unified, and that hurts efficiency.
Q5: So where does this leave investors?
Santi:
We believe the opportunity lies in US defence names – especially those with export exposure: think Lockheed Martin, RTX, Northrop Grumman, and L3Harris.
These firms not only benefit from US defence spending, but also from Europe’s growing dependence. And if Asia-Pacific allies like Japan, Korea and Australia ramp up their spending, as they did in Trump’s first term, US firms are the go-to suppliers.
In a world defined by uncertainty – whether in Europe, the Middle East, or Asia – defence is no longer a backwater sector. It’s a frontline opportunity. Any lasting peace in Ukraine would certainly require muscular deterrence of Russia for years to come.
Ankit:
With that we end our podcast today
Please get in touch with your BBVA sales representative to get a copy of our research report on Defence stocks and details of our BBVA Transatlantic Defence index.
Thank you for listening, and goodbye