Rhinegold: a (cursed) treasure is rediscovered

• Alexis Bienvenu
  Fund manager
  LFDE

Europe has just rediscovered this gold. Will it seize it, knowing the consequences of its action?

Of course, the gold that we are talking about has changed somewhat in appearance in the last thousand years. But it is easily recognisable. Today, for example, it is called “Rheinmetall”, a German company specialised in arms and equipment and based in Düsseldorf – on the Rhine of course. Its share price has had a dazzling performance – up 44% since the beginning of the year (as at 21 February), and up 947% over three years! But there are other nuggets of European treasure outside Germany, such as Leonardo, Thalès and Airbus. They are combined in a strongbox entitled the STOXX® Europe Total Market Aerospace & Defense index. Since 1 January 2025, this portfolio has risen by 15% (as at 20 February), outperforming most global indices. Better still, since the start of the war in Ukraine on 24 February 2022 – exactly three years ago – this index has skyrocketed 136% (in euro), outstripping even the Magnificent Seven, i.e. the US tech giants, despite their spectacular trajectory (up 131% in dollars).

The source of the explosion in defence-related stocks can of course be found in the outbreak of war in Ukraine. But over time, this trend has been supported by a more structural factor: the complete overturning of European dogma on defence. Spurred on during Trump’s first mandate by his threats to withdraw the US from NATO if the Europeans failed to respect their commitment to devote 2% of their GDP to defence, next backed into a corner by the war in Ukraine and then by Trump’s recent statements seeming to support Russia’s territorial claims and reducing his support for Ukraine, Europe finds itself forced to treat the issue of defence as a new priority. The budgetary shift has been notable – for a long time below the 2% of GDP demanded by NATO, military spending has recently grown. The target of 5% has even been mentioned by President Macron, echoing one of Trump’s demands. Although such a level appears unachievable in the short-term, it nonetheless indicates the direction of travel. A target of 3.5% by 2035 – close to the current level of the US – looks conceivable.

How can such an effort be funded? If this expenditure were to rely solely on national budgets, which have for the most part been bled dry, it would rapidly become a no-go. But Europe is adept at being inventive when cornered. We should thus expect the creation of new supranational schemes, authorised to issue debt devoted to military projects. The European Investment Bank could have a role to play, partnering with private investors to leverage the amounts on the table. This could be supported by regulatory innovation, such as the exclusion of new military spending from the public deficit calculations monitored by the European Commission.

The implementation of these schemes will not be immediate. But looking out a few years, this effort would transform the sector and European research, as well as employment. Barclays¹ estimates the additional growth, in a median scenario, at 0.1% to 0.3% per year, with a cumulative impact of around 1.6% by 2035. That may seem modest, but it represents EUR 1625 billion of additional spending versus the current trend. And this calculation is based on an assumption of defence spending of 3.5% of GDP. A scenario of 5% would double this impact.

From a market perspective, the consequences appear clear. More public debt, but this time with approval. More growth, focused on a few sectors. And greater wealth for arms manufacturers, which will, for a while, be like the new gold of the Rhine – or of the river Garonne in the case of Airbus. But the myth warns that seizing this gold means renouncing love – effectively, less money for hospitals and education. The Wagnerian cycle that opens with The Rhinegold reminds us that renouncing love is not without consequences – the final opera in the cycle is entitled Twilight of the Gods.

The opinions cited are those of the fund manager. LFDE shall not be held liable for these opinions. The stocks mentioned are given by way of example. Neither their presence in the portfolios managed nor their performance are guaranteed.

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¹Barclays, Europe Plays Defence, 21 February 2025

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Disclaimer
This information, data and opinions of LFDE are provided for information purposes only and therefore do not constitute an offer to buy or sell any security, nor do they constitute investment advice or financial analysis.