Market Update 24th March 2025

The changing world order

Germany passing its new infrastructure and defence spending plans is enormous news. In absolute terms, the EUR500bn that has now been officially approved for infrastructure is not dissimilar to Joe Biden’s (somewhat ironically named) Inflation Reduction Act. However, since the population of Germany is almost equivalent to that of just two of the most populus states (California and Texas) the per capita spend is even more significant. The increase in defence is what will grab attention though. The repeal of previous rules on debt levels paves the way for defence spending to rise to somewhere around 3% GDP by 2027, from just 1.3% in 2021, the last complete year prior to Russia’s invasion.

Germany is not the only European nation prioritising defence spend either. The prospect of hundreds of billions of extra orders in the coming years across the continent has sent share prices for most companies connected with defence soaring. We had been positive on some in the sector for a while prior, with one of the continent’s leading providers featuring in our best ideas list. However, we cannot claim this was because we were able to predict Trump’s election victory and subsequent approach to foreign policy, and the actions and reactions of Putin and European leaders.

This is because our approach to equity selection is to focus on the business itself, rather than try and predict the path of macro events and anticipate the knock-on effect of one to the next. This is especially appropriate when the only predictable thing about several of the individuals at the top of global politics is their unpredictability. The truth of the matter is that getting to where we have done on European defence policy was far from inevitable. If it were, the bounce in the sector, particularly in the German names, would have been entirely foreseeable and thus would not have been possible.

While there is no doubt the selection has been boosted by wider conditions, our original thinking around the defence company in question was based on a solid order book, a track record of delivery, and underlying improvements in both cash generation and its solid balance sheet.

From that same company-first viewpoint, how do we see equity markets now? Signals are mixed. While the last round of corporate results (which generally covered the three months to the end of December) was good, with the majority of US companies exceeding forecasts, there were a couple of areas of weakness. Some industrial businesses bemoaned a harsher environment, and this caused some turbulence in the sector. We also thought companies across the board were less willing to give positive guidance, again citing heightened uncertainty.

This tallies with some of the wider macro indicators. Retail sales in the US have undershot expectations, and consumer confidence is falling. Tariffs have been discussed to death, but it feels as though the uncertainty has coincided with the President doubling down on his flagship policies.

A weaker consumer and uncertainties around supply chains and trade means we’re also seeing profit revisions starting to come through. It’s normal for analysts to revise numbers through the year, and usually they do so negatively. However, the downgrades are happening at a more rapid pace than usual. FactSet’s Earnings Insight report highlighted that US large cap estimates for Q1 has declined by -3.8% since the start of the quarter, worse than the 5 and 10 year average declines of around 3.25%.

The net effect has been a whipsaw in US equity exposure, with the biggest contraction on record as investors retreat from the extremely crowded tech trade that had pushed concentration in the US equity market to extraordinary levels. It is interesting where that money is going. Cash is, relative to its usual allocation levels, extremely popular. That hopefully implies allocators are still bullish on equity, and are merely sitting on the sidelines waiting for a time to get back in. But of course, to assume as much is foolish.

As above, our default stance is to be led by the information and guidance companies are giving us. While last quarter’s guidance was generally clouded by the recency of the newsflow around the tariff wars, hopefully we get more precise indicators when first quarter results start to be published in April.

We can hope for an improvement in sentiment, but we should prepare for the next round of corporate reporting bringing further uncertainty. This ‘hope for the best, but prepare for the worst’ stance underpins our equity selection style, which is biased towards businesses with multi-year track records, strong management teams and impressive financials. We remain confident focusing attention on these type of businesses is the right approach for clients.

George Salmon – Senior Research Analyst

Hawksmoor Investment Management Limited is authorised and regulated by the Financial Conduct Authority (www.fca.org.uk) with its registered office at 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS. This document does not constitute an offer or invitation to any person in respect of the securities or funds described, nor should its content be interpreted as investment or tax advice for which you should consult your independent financial adviser and or accountant. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. The editorial content is the personal opinion of George Salmon. Other opinions expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represent the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. Currency exchange rates may affect the value of investments. FPC25325