The cost of peace
The cost of peace
Current geopolitical tensions continue to shape global markets, with the ongoing Ukraine-Russia war, Israel-Palestine ceasefire, shifting alliances, and rising security concerns prompting governments to reassess their defence strategies.
Heightened tensions in Eastern Europe, along with growing concerns over Russia’s actions and increasing pressure from NATO for member states to meet the 2% defence spending target, are likely to drive up military spending. It is hard to accurately estimate how markets will react in the current geopolitical climate in the long term, but in the short term there may be tactical shifts towards European equities. With Germany and other European nations increasing military spending and considering fiscal loosening, capital may shift towards companies that benefit from the growing security concerns and increased public investment. Additionally, expectations of the European Central Bank (ECB) cutting rates to 2%, may assist the European economy and equities.
Military expenditure as a percentage of gross domestic product (GDP*) varies significantly across countries, reflecting different strategic priorities and security concerns. In the UK, Sir Keir Starmer has pledged to strengthen the nation’s defence by increasing spending from 2.3% to 2.6% of GDP - an additional annual cost of £5bn-£6bn.
Percentage of GDP military expenditure by country / region
Source: Bloomberg, Artorius
Source: Bloomberg, Artorius
*Gross domestic product (GDP) is a measure of the size and health of a country’s economy over a period of time and it can be used to compare the size of different economies around the world.
No more handbrake? Rethinking Germany’s fiscal tightrope
With Merz and the Christian Democrats (CDU/CSU) winning the German election, the country has been debating whether its constitutional debt brake (Schuldenbremse) needs reform. Introduced in response to the 2008–09 financial crisis, the debt brake limits public debt to 0.35% of GDP. In the recent election, the CDU/CSU secured 28.6% of the vote and could form a majority government with another political party. However, since amending the debt brake requires a two-thirds majority in both the lower and upper houses, the new government will need to negotiate extensively to build a broader coalition. If successful, this could have significant economic and political implications.
Germany has maintained a tight fiscal framework, which may have contributed to the relatively weak economic backdrop over the past two decades. Since 2001, the German economy has grown by 92%, compared to 178% for the US economy (growth figures include inflation). Over the same period, the fiscal deficit has averaged 1.4% in Germany, compared to 5% in the US. For the EU, and particularly for Germany, adopting a looser fiscal policy through increased government spending and tax cuts could boost economic growth and create a more supportive backdrop for European equities. Moreover, as stimulus measures take effect and the economy gains momentum investor confidence may grow, drawing more capital into European markets.
Government deficits as a percentage of the economy in Germany and the US
Source: Bloomberg, Artorius
Source: Bloomberg, Artorius
Nvidia’s earnings: Strong but not exceptional
Nvidia reported its 2024 Q4 earnings on Wednesday 26th February. Once again, its financial performance exceeded market expectations for both revenue and profit delivery. According to Bloomberg consensus, company guidance was also ahead of market expectations. However, despite another strong set of results and positive forward guidance, the subsequent fall in the share price suggests the market has priced in the company’s current momentum and perhaps also expectations for some future margin pressure.
The Q4 reporting season highlights that US earnings have remained strong albeit momentum has reduced. European earnings are now showing signs of recovery alongside an outlook that includes some potentially beneficial tailwinds. These include the likelihood of further interest rates cuts from the ECB and the possibility of a Trump-peace deal for Ukraine. Both factors would be supportive catalysts for the European economy.
With valuation risk in the US remaining and a more positive economic outlook for Europe, we have recently tilted our equity exposure towards Europe whilst reducing our US exposure.
Mark Christie
Investment Analyst
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Important Information
All expressions of opinion reflect the judgment of Artorius at 28th February 2025 and are subject to change, without notice. Information has been obtained from sources considered reliable, but we do not guarantee that the foregoing report is accurate or complete; we do not accept any liability for any errors or omissions, nor for any actions taken based on its content. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. Past performance is not a reliable indicator of future results. Nothing in this document is intended to be, or should be construed as, regulated advice. Artorius provides this document in good faith and for information purposes only. Reliance should not be placed on the information contained within this document when taking individual investments or strategic decisions.
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