Saab’s stock has surged by 30% in the past week and is now on the brink of reaching a new all-time high. This unprecedented rise can be attributed to several controversial statements from the United States, as well as the announcement that the White House will engage in negotiations with Russia to achieve peace in Ukraine.
The remarks made by Donald Trump’s Defense Secretary, Pete Hegseth, sparked controversy when he stated last week that the long-term military presence of the US in Europe cannot be taken for granted. He urged EU countries to increase their defense spending and take more responsibility for their own security.
Hegseth also hinted that it would be Europe’s responsibility to guarantee Ukraine’s security after a potential agreement with Vladimir Putin.
“It is remarkable that the US will negotiate the terms of peace, but Europe will be responsible for maintaining security guarantees,” said Joakim Agerback, manager of the Finserve Global Security Fund, to Afv.
### Crisis Meeting in Paris
French President Emmanuel Macron has called for a crisis meeting today, with the participation of Germany, the Netherlands, and the United Kingdom. According to Bloomberg, the EU is concerned that Ukraine may be forced into a catastrophic settlement if the union does not quickly present a plan for military support.
“We will launch an unprecedented comprehensive package. Just as we had a financial package during the euro and coronavirus crises, we will now have a financial package for Europe’s security. It will be announced shortly,” said Germany’s Foreign Minister Annalena Baerbock, as reported by Bloomberg.
Lithuania’s Defense Minister Dovile Sakaliene stated that the realization that Europe must defend itself dramatically changes the security situation on the continent.
“We must invest in defense quickly and significantly, hundreds of billions must be spent immediately.”
### “Frozen Conflict”
On Monday afternoon, Saab’s stock is up by 13%, marking the second-best trading day since the outbreak of war on February 24, 2022. Similarly, sector peers Rheinmetall, Leonardo, and Kongsberg Gruppen are experiencing significant increases.
“This is a result of the communication coming from the US. The alliance with Europe is being redefined, and it is clear that significantly higher defense expenditures are needed than before,” said Joakim Agerback.
He added that the expectations for the crisis meeting in Paris are that European leaders will communicate clear support for Ukraine and significantly increased defense investments.
“Defense budgets at 2% of GDP are no longer sufficient.”
NATO Secretary-General Mark Rutte stated over the weekend that member countries need to invest much more than 3%. Donald Trump, on the other hand, called for a substantial raise to 5%.
### Giants Could Benefit
According to Agerback, the current events point towards long-term strong growth in the defense sector, although he anticipates increased volatility.
If Europe increases defense spending, he believes it will particularly benefit traditional defense giants like Rheinmetall, Kongsberg Gruppen, Leonardo, and Saab.
“They are probably the ones best positioned to win major contracts if we see a common European effort. Even their subcontractors could be interesting,” he said.
Despite several stocks trading at record levels, Agerback sees continued upside potential.
“Valuations have risen, but it is reasonable to assume that growth and earnings expectations will also be adjusted upwards, which could provide further support for defense stocks,” said the manager, who owns several of the companies in his fund.
### “Frozen Conflict”
The manager highlights peace talks as the most crucial factor for future price developments. He believes it is most likely that negotiations between the US and Russia will result in a “frozen conflict,” an agreement that neither Europe nor Ukraine can support. This scenario would lead to further rearmament.
“The market has previously assessed that ongoing peace talks could lead to significant declines for defense companies. But based on the fact that Europe must now take significantly greater responsibility than previously expected, the risk has shifted to the upside.”