Mega trades gain as Europe seeks strategic independence and growth

Investor focus is shifting decisively toward Europe, embracing "Make Europe Great Again" (MEGA) trades as markets anticipate substantial fiscal expansion, defence spending, and greater economic independence from the U.S. While caution remains prudent given the gradual impact of German defence and infrastructure spending, investors are increasingly positioning for long-term strategic opportunities across multiple sectors. Defence stocks continue to attract considerable attention, driven by Brussels’ planned €800 billion rearmament and infrastructure spending initiative, alongside Germany’s substantial fiscal expansion. European aerospace and defence shares have already surged approximately 33% year-to-date, with valuation multiples now rivaling premium sectors like luxury goods and technology. Notably, Rheinmetall briefly exceeded Ferrari’s valuation, trading at 44 times expected earnings, reflecting investor enthusiasm for defence sector exposure. Projected profit growth for major defence companies remains robust, with estimates indicating annual growth rates between 8% (BAE Systems) and 32% (Rheinmetall) through 2028. Yet challenges persist, as the EU currently sources approximately 78% of its defence procurement externally, primarily from the United States. Investors, therefore, are advised to target subsectors with immediate demand such as ammunition and infantry equipment. Complementary sectors like communications and logistics also stand to benefit significantly. Eutelsat, a Franco-British satellite operator, exemplifies this trend, surging over 260% this month amid potential opportunities related to providing internet access to Ukraine, potentially replacing Elon Musk’s Starlink. Additionally, infrastructure-related companies, such as Scania (a unit of Traton), Atlas Copco, and broader construction sectors, are anticipated to see sustained demand driven by increased government spending. Bond markets are also experiencing transformative shifts as Europe moves toward issuing additional joint EU debt and expanded German sovereign bonds. Germany’s historic fiscal expansion could see an additional €1 trillion in debt issuance, while the EU’s proposed joint borrowing of €150 billion to support defence expenditures enhances the bloc’s triple-A rated asset base. These developments reinforce the euro’s global reserve currency status and suggest Europe's evolving role as a regular and strategic borrower. European banks, benefiting directly from the improved economic outlook, have surged by 26% year-to-date, marking their strongest quarterly performance since 2020. Germany’s economic growth prospects are improving, with forecasts suggesting a GDP expansion of approximately 1.4% annually for 2026 and 2027 following extended stagnation. Analysts highlight banks as major beneficiaries of the anticipated steepening yield curve and accelerated credit growth. Regulatory relief, potentially inspired by U.S. deregulation, further boosts sentiment toward European banks, making them an attractive investment segment. Southern European equity markets, particularly in Spain and Italy, have also attracted attention due to their lower valuations compared to core European markets. These markets possess less direct exposure to U.S. tariffs and benefit significantly from their strong banking sectors, offering attractive risk-adjusted returns amidst Europe’s broader economic recovery. Lastly, renewable energy remains a central component of Europe's strategic shift towards energy independence. Recent policy initiatives by the European Commission aim to accelerate renewable project approvals, adjust energy tariffs, and enhance state aid for clean industries. Germany’s planned €100 billion investment in climate transition underscores the scale of commitment. Renewables, especially solar power, continue gaining prominence, now accounting for 11% of EU electricity generation, overtaking coal for the first time. Consequently, utility companies focused on renewable energy, such as Iberdrola, Endesa, and Enel, have experienced significant gains ranging from 7% to 16% year-to-date. Investors are clearly recognizing the opportunities emerging from Europe's strategic pivot toward greater economic autonomy, increased defence spending, banking sector strength, and a robust commitment to renewable energy.