abrdn Equity Income Trust PLC reposted this
On BBC's Business Today earlier I ran through the market implications of recent geopolitical events: (1) Aerospace and Defence stocks: BAe Systems and Rheinmetall surging +14% today - each of these stocks now c.£40bn/€50bn market cap, so each adding c.£6bn in one day. Hard to believe these stocks both traded at 10x Price/Earnings as recently as January 2022......now both trade at over 20x Price/Earnings, as investors look ahead to earnings upgrades resulting from increased defence spending. As the MAG-7 stocks (like Nvidia) fade, is that US money now sloshing into European defence stocks? (2) Bond yields going up: The second-round impact today was higher bond yields, as investors asked whether defence spending would be financed by bond issuance or taxes. This has implications for mortgage rates, at an already difficult time for household budgets. If higher defence spending is seen to add to the pain already being felt by consumers from higher energy bills, this could drive a popular backlash. Stagnant economic growth makes bond markets more sensitive about each incremental £bn of unexpected government spending. Bond vigilantes are monitoring the situation carefully - and Rachel Reeves is aware of this - hence her comments about hypothecating money from the new National Wealth Fund, Russian assets and the Overseas Aid budget. Meanwhile, her ability to hike taxes to raise the money for more defence spending is limited. The hike in employer National Insurance contributions is already impacting inflation and employment, reminding the Chancellor that tax hikes can have unforeseen adverse consequences. Meanwhile high earners are reportedly leaving the UK in record numbers. There comes a tipping point at which higher taxes don't always result in higher tax revenues. (3) Fiscal priorities set to evolve: Prompted by President Trump, the UK and Europe are showing more urgency in their commitments to ramp up defence spending to at least 2.5% of GDP. This addresses the under-investment in defence in recent decades, predicated on the peace dividend resulting from the end of the Cold War. European countries are strapped for cash, so we can expect policies that prioritise "wants" to be replaced by policies that prioritise "needs", with implications for bloated public sector departments and anti-growth policies. Natural gas prices rose today. Energy security and the cost of energy will come into sharper focus, with implications for energy policy. (4) Ricardian Equivalence: This is the hypothesis that consumers are forward-looking and so internalise the government's budget constraints when making their consumption decisions. Higher defence spending needs to be financed, so the risk is that European economies will slow as consumer rein in their spending, especially as consumers are already feeling nervy due to the risk of tariffs. #investments #bbc #economics