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Risk information: Historical returns are no guarantee of future returns. The money invested in the fund can both increase and decrease in value and it is not certain that you will get back all of the capital invested.

Concerns in the stock market

After a strong year for the defense and security sector, recent months have been marked by increased volatility and broad price declines. European defense companies have fallen sharply recently, while the global stock market, not least the technology sector, is showing signs of increasing risk. Uncertainty about the long-term profitability of AI companies and generally high valuations contribute to a more challenging risk climate.

The defense sector has been one of the best performing sectors this year, which has also made it more sensitive to market turmoil. The latest correction is not unexpected in my opinion after a long period of strong performance, but the declines are greater than fundamentals justify.

Portfolio adjustments

We had already reduced our overweight in Europe to a more cautious level ahead of the autumn turbulence, although we continue to see attractive opportunities there. At the same time, we have increased exposure to the Pacific region and, in the last week, to North America. Our ambition is to maintain a balanced and effectively diversified portfolio, which is key when volatility has increased.

The recent declines have been broad, including in Asia, which has negatively affected the fund's performance. The assessment is that a correction has been healthy and provides more attractive levels for new positions.

Ongoing initiatives for ceasefire or peace

There has been some discussion about how a peace or ceasefire would affect defense stocks. We invest not based on short-term geopolitical news, but on long-term structural trends in defense, space and cybersecurity.

In the short term, geopolitics can create both upward and downward movements, which contributes to the fund's different return profile. In the longer term, it is the investment levels in the sector that drive returns – and there we assess that the trend is clear and the need for large defense investments is intact.

A ceasefire in Ukraine does not necessarily mean lower European defense budgets. On the contrary, there is concern that Russia would use a pause to build up new aggressions. If the US simultaneously reduces its support, the arguments for increased European investments will be further strengthened. It is clear that it is Europe that will need to make investments for European security and peace. A peace on Putin's terms would also weaken the rules-based world order, which in itself could increase the need for security-related investments globally.

Values in the defense sector

The defense sector is trading at a premium valuation, driven by faster earnings growth and high profitability. The fund's average P/E ratio is 26, but forward-looking valuations are lower as earnings forecasts are revised upwards.

In comparison, the S&P 500 trades at a P/E of 22 and the MSCI World at 19.5 – without corresponding earnings growth. There are companies in the sector that we exclude or hold small positions in due to overvalued valuations. However, over time, I believe the sector will continue to have a premium valuation, and the downturn makes the valuations more attractive to investors.

External analysis of the defense sector

We highlight this analysis from analyst David Perry from JP Morgan in MorningstarThe analyst's assessment is that the decline in the defense market is unjustified and creates an interesting entry point into the sector. He lists two arguments:

The peace plan does not appear to be acceptable to Ukraine and is unrealistic to achieve.
If the peace plan still reaches its goal, but is so favorable to Russia, it will drive further defense investments in Europe for European security.

Defense a long-term investment

The fund has a relatively high level of risk and is therefore intended for long-term savings, preferably with a horizon of 3–5 years. This coincides with the long-term trend of increased defense investments and long investment cycles. We want to offer a liquid, daily traded fund that also provides clear diversification value, something that is unusual for equity funds.

Europe should now work towards a ceasefire or peace that is sustainable in the long term for Ukraine and the long-term security situation in Europe.

Market Commentary Finserve Global Security Fund – Joakim Agerback, Managing Director: How are defense companies affected by ongoing peace talks in Ukraine and unrest in the stock market