Barlow’s Research Roundup: Outlook for this sector is ‘stronger than ever’

Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

Europe re-arming

Morgan Stanley analyst Ross Law published The Case For EU Defence Is Stronger Than Ever and I have to agree. Higher defence spending seems assured in the region thanks to U.S. policy,

“The EU Defence sector has been volatile over recent months - despite a strong start to 2026, the sector has been broadly flat since the start of the Middle East conflict and over a 6 month view. Every stock in the sector is trading below its previous high reached over the past year, by an average of approximately 20 per cent. Most of this has been a derating (P/E FY3 multiple down 17 per cent from peak), with the sector falling from the 23x reached several times over the past year, to 20 times today (at the bottom of the 20-25-times range, which we think most accurately reflects fundamentals). This does not match up with our view that fundamentals for the sector continue to improve. Recent geopolitical events (including Iran, Greenland, Venezuela) reinforce a case for increased European defence spending and greater strategic autonomy. As such, we believe the investment thesis underpinning our positive view on the sector remains firmly intact and would use the recent lacklustre performance as an attractive buying opportunity”.

Mr. Law has buy-equivalent ratings on aircraft engine maker Rolls Royce Holdings PLC and Airbus SE.

Strait of Hormuz still closed

RBC Capital Markets head of global commodity strategy and MENA research Helima Croft outlined the state of play for the Strait of Hormuz,

“After threatening the annihilation of the Iranian civilization at the start of the day yesterday, President Trump was in turn able to pull a proverbial rabbit out of the hat by announcing a surprise 14-day ceasefire. While the announcement has triggered a sharp selloff in paper oil prices, questions about the deal’s durability loom large. Gulf countries have been subject to a significant wave of attacks since the ceasefire was announced. The UAE’s Ministry of Defense has reported that 17 ballistic missiles and 45 drone attacks had been intercepted since the ceasefire took place. Kuwaiti officials have also reported ‘intense’ attacks throughout Wednesday, targeting oil infrastructure and three power and water desalination facilities, with 28 drones intercepted at the time of writing. A pumping station on Saudi Arabia’s key East-West Pipeline—which has allowed the Kingdom to maintain exports in excess of 5 mb/d—was also struck earlier this morning. These Gulf countries are unlikely to be pleased with a deal that essentially enshrines a $2-million Tehran tollbooth fee. We continue to contend that actual transit levels through the waterway will remain significantly depressed given that Iran is insisting vessels must coordinate with its military or face destruction. Most critically, Iranian state media has reported that transit through the Strait of Hormuz is now halted in response to ongoing Israeli attacks on Lebanon”

Too eager?

Scotiabank strategist Jean-Michel Gauthier thinks investors might be getting ahead of themselves,

“Despite conflicting headlines yesterday, investors largely embraced the ceasefire agreement, remaining focused on so‑called ‘TACO’ trades. However, the cease-fire remains fragile as witnessed overnight. We would expect equity markets to remain volatile in the short run: headlines continue to be the main driving force of short-term movements and much of the pent-up demand may have been spent... sentiment as measured by our Panic-Euphoria indicator had already been recovering fast since March 30 lows. Yesterday’s 2.5-per-cent pushes the rebound to 6.9 per cent since March 30 on the S&P 500. Breadth (advance/decline, volume, 52 weeks highs/lows) has also been extremely high, highlighting at a broad rally. Other measures of sentiment also never hit extreme fear or have already recovered to neutral levels. Hence, with most equity indices within a 5-per-cent range of their all-time high, we would stick with our recently recommended barbell approach to ride out market gyration until a clearer narrative emerges (hopefully one of solid Q1 earnings with a coming Middle East peace resolution)”

Bluesky post of the day

Diversion

“The Top 10 Movies Right Now, According to Streaming Data” - Lifehacker