Global Security Fund månadsrapport – juni 2024

Global Security Fund Monthly Report – June 2024

Short-term concern and volatility in the defense sector at the same time as Defense and Cybersecurity shows that we are in a long-term structural trend that is continuously increasing in strength

During June, the fund was down -2.78 % and took the annual return down to 19.48 % for the year. The background to the decline was a broad decline in the European defense industry, which was led by Airbus coming out with a weaker forecast than expected. Airbus adjusted down the forecast for the number of manufactured planes for 2024 from 800 to 770 (-4 %). This occurs as a result of delays in supply chains and increased costs. Airbus also revised up expected costs for its space program.

The aerospace and defense industries are closely intertwined, so when a leading player like Airbus gives a weak forecast, it also affects suppliers, partners and competitors. This presents potential challenges for the entire sector and as a result the sector was weak following the news.

We have written several times about the volatility in the industry and it is likely to be persistent, especially during the summer. We believe that declines provide possible buying opportunities and that the industry remains in a strong trend for many years to come. Airbus has a strong position compared to Boeing where their A320 Family plane has been a success. As of 2019, Airbus manufactures significantly more commercial aircraft than Boeing and by 2023 produced 720 compared to Boeing's 445. They also have a larger order book and have benefited from Boeing's brand being negatively affected by the flaws discovered.

Production capability, quality level together with geopolitical tensions make Airbus better positioned for the strong growth in the Asia-Pacific region. However, both Boeing and Airbus are interesting and together they have a unique and strong position in the manufacture of commercial aircraft and they will both have a key position for technological development progress in space.

The company's largest position Rheinmetall also went down significantly for the month -10 % but was still up at the end of June with a strong 70 % for the year. The development is affected by analysts' views on valuation and recommendations, where there is concern about high valuation after such strong stock development, but also that the profits did not enter the books as quickly as expected. Deutsche Bank downgraded the stock from buy to hold. In parallel, however, Barclays raises its valuation to €590 and JP Morgan its to €600 and the stock traded at the end of the month at €475 and the fund sees significant upside over time.

The fund places great importance on the strategic position of defense companies in the ongoing modernization of, above all, European defence. Rheinmetall and Leonardo are key holdings for the fund and they are both part of a joint venture to bid for major defense contracts, such as armored vehicles for the Italian government, worth up to $21.5 billion. This partnership is seen as an important step towards consolidation of the European defense sector and significant as Europe wants to reduce the number of systems and suppliers and to achieve economies of scale similar to the US. Rheinmetall continuously increases production capacity, receives significant order intake and has a strategic diversification in products and customers and is in an absolute key position in European defense growth.

Cyber Security performed very strongly in June with top Cloudflare (+22.37 %) and Crowdstrike (+22.16%). In June, the Cybersecurity Summit took place and it emerged that large investments are being made in the sector as a result of increased awareness of risks. Influential Gartner reported that integration of generative AI is ongoing and central to cyber security and also effective and efficient. In addition, increased regulatory requirements and security updates are forcing companies like Microsoft to make major investments to meet compliance and protect against cyber threats. The regulatory requirements and the close connection with the growth in AI mean that the sector is characterized by a long-term structural growth similar to the defense industry. The sector will also benefit from interest rates expected to fall over time.

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