Europe Unites to Strengthen Itself... Beneficiary Sectors Identified [Weekend Money]

Defense, Nuclear Power, and Power Grid Sectors Poised to Benefit
Short-term Fiscal Pressures Expected
Long-term Outlook: Structural Discount on the Euro May Ease

Recently, as Europe intensifies structural self-strengthening efforts in response to changes in U.S. security commitments and volatility in its energy supply chains, there is growing attention on the ripple effects these moves may have across financial markets, including equities, bonds, and foreign exchange.

European Parliament plenary session. Photo by Yonhap News Agency

According to Meritz Securities, Europe has moved beyond the stage of mere political declarations regarding "strategic autonomy" and has now begun implementing practical measures that reshape its financing and industrial structures. These actions include increasing defense spending, pursuing energy independence, integrating capital markets, and expanding the European Union (EU) long-term budget.

Amid these changes in Europe, certain sectors in the stock market are garnering attention as beneficiaries. In the defense sector, a target has been set to invest 5% of gross domestic product (GDP) in defense by 2035, which is expected to provide direct benefits to defense contractors. For energy independence and the transition to electrification, power grid equipment (such as cables, transformers, and interconnectors) as well as nuclear power and small modular reactors (SMRs) are in the spotlight. Additionally, as the capital market integration led by the six major countries (E6), including Germany and France, gains traction, it is anticipated that increased utilization of intra-regional capital will benefit exchanges and asset management companies.

On the other hand, the bond and foreign exchange markets are expected to experience both short-term pressures and long-term opportunities. Increased investment by European countries could lead to an expansion in government bond issuance and upward pressure on term premiums. Ultimately, the key issue is how much the EU’s joint resources and private capital mobilization can absorb the fiscal burdens of individual countries.

The euro may also face downward pressure in the initial stages due to the fiscal burden from expanded investment. However, from a long-term perspective, if reduced dependence on energy imports, mitigation of security risks, improvement in capital market depth, and a shift from domestic savings to domestic investment become reality, the structural discount that has weighed on the euro could be alleviated.

Seunghoon Lee, researcher at Meritz Securities, stated, "Europe's self-strengthening efforts are not an anti-U.S. or anti-North Atlantic Treaty Organization (NATO) stance, but rather a form of structural insurance against changes in U.S. security commitments and volatility in the energy supply chain." He added, "Europe is uniting to strengthen itself and has begun to propose solutions to address chronic bottlenecks."

This content was produced with the assistance of AI translation services.