Panmure Liberum strategist Joachim Clement says investors need to reconsider valuations in the defense sector, given the rapidly evolving nature of warfare and modern military requirements.
Clement told CNBC’s “Squawk Box Europe” on Monday that while an increasingly challenging geopolitical environment continues to support a secular bull market in the defense sector, procurement risks, fiscal pressures and AI trade are starting to separate winners from losers.
He said investors are becoming more selective, considering not only how much governments promise to spend, but also whether that money goes to traditional platforms or AI-enabled systems, drones and electronic warfare.
The next generation of defense winners could look more and more like software and AI companies rather than traditional weapons makers, Clement said.
“Electronic warfare is a technological phenomenon,” he added. “These companies need to be traded like technology companies.”
That means some stocks in the sector may deserve “much higher valuations” than traditional military companies, Clement said.
European defense stocks have been among the clearest winners in the continent’s rearmament drive.
But some of the sector’s biggest winners have come under pressure recently, signaling a new phase in European defense trade in which investors no longer treat rearmament as a blanket buy signal.
Clement argued that Germany’s cancellation of the F126 program shows that even in a world of growing defense budgets, expensive legacy programs can be vulnerable if they are slow, expensive or not aligned with changing military needs.
“Very often the generals are fighting the last war, not the next one. The problem is that Europe’s military-industrial complex is dominated by conventional weapons manufacturers, whether it’s tanks or artillery,” Clement said.
“What the German government is not doing and where line metal “We are also behind the curve and are focusing on AI-enhanced weapons systems (and) drone-enhanced weapons systems,” he said, noting that companies like Italy are looking at them. leonardo and the British BAE Systems We are building a fighting system that utilizes AI and drone technology.
Hugues Lavandier, a senior partner at McKinsey, told CNBC last month that European defense spending is occurring “in all areas,” including traditional land-based equipment such as main battle tanks and ammunition, as well as naval platforms such as aircraft carriers and frigates.
He also pointed to increased recognition of the importance of deep strike capabilities, counter-drones, and unmanned systems, and increased investment in new areas.
Is it an issue with investor flow?
Defense stocks have seen significant gains over the past five years. Clement suggested that the recent weakness reflects investors’ shift to AI trading, rather than a deterioration in defensive fundamentals.
“For us, it’s not about fundamentals, it’s about flows. A lot of fund managers are hungry for money,” he said, citing companies such as: alphabet and space x We’ve been raising a lot of money lately.
“Looking at the fundamentals, the rearmament movement in Europe continues unabated, with Germany and Poland in particular spending more and more money on defense.”
