Morningstar Investment Conference: These Top Managers Like European Defense Stocks but Differ on AI Plays

Key Takeaways

• The European defense sector offers attractive investment opportunities as defense spending surges, fund managers said at the Morningstar Investment Conference.
• China is emerging as a dominant force in AI with its competitive advantage in energy production.
• The cyclical boom in memory, CPUs, and hardware has staying power.

Amid tariffs, a realigning of global alliances, new wars, and challenges to free trade, portfolio managers believe global investing must adapt to take advantage of new opportunities. Panelists at the Morningstar Investment Conference shared their views on the evolving global investing landscape and how they are changing their investment approaches to benefit while mitigating risks.

A starting point for the discussion was the geopolitical backdrop, which has caused short-term volatility in the stock market even as the global economy has largely weathered those shocks. That includes US President Donald Trump’s reciprocal tariffs, according to Conor Muldoon, portfolio manager at Causeway Capital Management. “Markets overreact in the short term and underreact in the long term,” he said. “When you look at broad data, like imports and exports as a share of GDP, global trade actually increased over the last 12 months despite tariffs.”

Muldoon said these trends are primarily driven by the artificial intelligence boom, as the United States continues to import large volumes of semiconductors from Asia. “Deglobalization takes years to actually show up in macro data,” he explained. “Firms are adapting behind the scenes, such as the administration’s push for an Intel-Apple chip manufacturing partnership in the US, but these supply chain overhauls take massive capital and time.”

JP Morgan portfolio manager Helge Skibeli said that against this volatile backdrop, he focuses on business resilience: “We look for companies with intense pricing power to absorb tariffs, or business models insulated from global friction.” Companies like TSMC “are aggressively diversifying. Five years from now, 20%-30% of their manufacturing capacity will sit inside the US. However, trade protectionism is spreading.”

Structural Capital Shifts: European Defense and Global Energy

The Russia-Ukraine War and US pressure have caused European defense spending to surge. Is this structural, or a flash in the pan? Causeway Capital’s Muldoon believes it’s the former: “In 2024, the US spent $800 billion on defense while Europe spent $400 billion. By 2030, Europe will close in on $700 billion.”

JP Morgan’s Skibeli expects European defense spending to structurally outpace nominal GDP for the next decade: “While stocks like Rheinmetall went up too fast, recent market pullbacks make them attractive again. We favor BAE Systems due to its strong air defense portfolio and massive US footprint.”

Carl Kawaja, equity portfolio manager at Capital Group, said he is looking for energy opportunities closer to home in Canada: “I don’t see the rerouting of Middle Eastern oil as the primary investment opportunity. Instead, Canada is incredibly plentiful in heavy oil, which US refineries are uniquely optimized to process due to low domestic natural gas costs.”

The AI Infrastructure Cycle

The focus turned to the trend of capital rotating from the Magnificent Seven toward international chipmakers and tech hardware suppliers. JP Morgan’s Skibeli said this was the most critical trend in global equity markets. “My strategy is to buy structural quality—TSMC, ASML, and Nvidia—over commodity-type players,” he said. “Right now, memory, CPUs, and hardware are having the cyclical boom of a lifetime because AI token demand is insatiable.”

Causeway Capital’s Muldoon said, “The structural behavior of the memory cycle has fundamentally changed. When Samsung, Micron, and SK Hynix negotiate with hyperscalers today, they are forcing customers to sign unprecedented five-to-ten-year long-term volume and pricing agreements to secure capacity. This forward commitment could extend the memory cycle far longer than traditional investors expect.”

Capital Group’s Kawaja said that while AI infrastructure spending has bubble characteristics, “bubbles are always founded on something real. To capture the alpha here, I am targeting second-derivative winners.”

The AI race is another key dimension that is reshaping the world order, with China emerging as a force to be reckoned with, Kawaja observed. “In the AI race, China’s true competitive advantage is energy production,” he said. “They are significantly ahead of both the US and Europe in generating the massive low-cost electrical capacity required to power AI data centers at scale. Dismissing their tech ecosystem is a profound mistake.”