Playing defense

European defence stocks continue their strong rally as governments prepare for increased military spending. The Goldman Sachs European Defense basket reached a record high, reflecting growing investor confidence in the sector. We own Dassault Aviation, the producer of the Rafale fighters, as a 3.2% position in our European Value Fund and believe it still offers value despite the stock being up 18% YTD. Its market cap of €18.3bn—of which its 26% stake in Thales ( defence electronics ) is worth €9.3bn and cash holdings amount to €1.5bn—effectively values its core business at just €7.5bn. This for a well-managed company generating €5bn in annual sales with an eight-year order book. As EU leaders discuss joint defence bonds and long-term security commitments to Ukraine, higher defence budgets are inevitable. Europe’s strategic autonomy is becoming more critical as reliance on the US for security diminishes.