Capital outflows from the US market and inflows also into Europe. Focus on Italian defense stocks

Flows are moving out of the US market, which currently accounts for 70% of global asset allocation, and are also being repositioned in Europe. The main positions remain in Leonardo and Fincantieri.

analysis by Andrea Scauri, manager of the Lemanik High Growth fund

The Trump/Zelensky clash and the EU extra-deficit fund of 400 billion dedicated to defense mean these stocks are set to benefit from a major inflow in the coming months. In the portfolio, the main positions remain Leonardo and Fincantieri.

Global equity markets ended February slightly in negative territory after hitting new highs in mid-month. European and Italian indices also outperformed US ones in February, supported by the increase in investor positioning in the European market. Excluding Meta, the technology sector - including the "Magnificent 7" - struggled, posting negative performance since the start of the year, also because of profit taking after strong gains and concerns over the sustainability and returns of (better-than-expected) investments in AI after DeepSeek. Italian mid-small caps performed positively but continued to underperform the main index in February. In Italy, the consolidation process has involved not only the banking sector, but also oil services, with the announcement of the merger between Saipem and Subsea7, aimed at creating a global leader.

The market’s attention has focused on: Trump and trade tensions; the elections in Germany; signs of a slowdown in the pace of growth in the United States. The Trump administration confirmed new 25% trade tariffs on Canada and Mexico starting March 4 and doubled those on China, with a 10% increase in tariffs already in force from April 2. This escalation in trade tensions is creating uncertainty in the markets and could trigger a series of bilateral negotiations between Washington and the countries hit in order to improve the conditions applied. The market is currently assessing a very concrete approach to tariffs. This new phase of trade tensions will inevitably bring volatility to the markets. It remains to be seen whether these decisions will be negotiated or whether they will have concrete effects on companies. In our view, we are in the first scenario, but uncertainty could delay investment decisions and, after the sharp outperformance of European markets versus US ones since the start of the year, we believe a more cautious approach is advisable in the short term.

The results of the elections in Germany were moderately positive for the markets, avoiding the most critical scenario of strong growth in extremist parties. However, uncertainty remains over the possibility of a decisive fiscal reform, which would be the real game-changer for European markets. CDU/CSU won by a wide margin, but will be forced to form a coalition with the SPD and/or the Greens in order to govern. We remain convinced that Germany will move to support economic growth. If it decides to use its fiscal room to relaunch the economy, that would certainly be a positive signal for investors, which could be amplified if the conflict in Ukraine were to ease. Merz is trying to fund both higher defense spending and tax cuts, amid tight debt constraints. Among the options under discussion is a new special defense fund worth 200 billion euros, which could bring military spending to 3.5% of GDP by 2028.

Our main interest stems from the growing signs of a slowdown in the pace of growth in the United States, with the latest Fed of Atlanta Nowcast projecting annualized real GDP growth of +2.3%, down from +3.2% the previous month. Corporate earnings growth is also showing signs of slowing, with particularly visible downward revisions in the automotive and construction sectors, while the positive exceptions stand out in banks and financial services. Macroeconomic concerns have pushed bond yields lower. In the United States, the 10-year Treasury fell by 30 basis points over the month to 4.24%, while expected inflation fell by 6 basis points to 2.37%, resulting in a 24-basis-point drop in real rates.

In Europe, the decline in yields was more limited: the bund fell by 7 basis points to 2.4%, while the yield on the Italian BTP remained broadly stable at 3.5%, with the spread edging up by 4 basis points to 114 basis points. On the macro front in Europe, the composite PMI index was unchanged in February in expansionary territory at 50.2, with a weaker services component, while the manufacturing sector slightly beat expectations but remained in contractionary territory. The commodities market rose slightly in February, led by higher copper prices after Trump ordered an investigation into copper imports from the United States, which could be the first step toward introducing new tariffs. Gold was also slightly positive, while oil was weak as the prospect of an agreement between Russia and Ukraine further reduced the supply risk premium. Natural gas also fell.

The Eurostoxx 50 index has returned to 1999 levels. The current level of 5,450 points is a key resistance level that, if broken to the upside, could lead the Eurostoxx 50 to narrow the gap with the S&P. The recent German bazooka (the 1,000 billion in extra deficit made possible by the presumed breach of the debt limit in Germany, which will be approved in the coming weeks by the old parliament) represents a radical shift for the European economy. Our sense is that flows are leaving the US market (which currently accounts for 70% of global asset allocation) and are also being repositioned in Europe. A modest 10% reallocation to the European market would have a very significant effect on the Eurostoxx 50 index. This is already visible in the nearly 12-percentage-point outperformance of the SX5E versus the SPX since the start of the year.

Our asset allocation is well balanced, with the right combination of growth stocks and relatively attractive multiples, such as Diasorin; commodity-linked stocks with significant untapped value, such as Danieli savings; cyclical names with limited downside risk to earnings revisions, such as Stellantis; M&A options in the banking sector, such as Banco BPM, Banca Monte dei Paschi, Mediobanca and Generali. In addition, our positioning in small/mid caps remains concentrated in a few quality/turnaround names, such as Newlat, Fincantieri, Dovalue, Lottomatica, Telecom Italia savings. We also confirm our investment in Campari, based on our view that the valuation has bottomed out. The main positions remain defense names, namely Leonardo and Fincantieri.