Positive for German equities. Bearish for long term Bunds (but not short term bunds). Marginally positive for the Euro.
The German coalition agreement and the published spending plans are positive for equities. My preliminary calculations show the sum of extra defence spending (under the relaxed debt brake) would be Euro 40 bn p.a for each of the next 5 years. And the infrastructure spending would be an additional Euro 41 bn p.a for 12 years.
Allow for 2 factors! A. 40% of defence spending may be outside Germany; B. It is questionable that this government can legislate spending beyond its 5 yr term of office .
That still works out at Euro 64bn extra spending per year for 5 years. That is 1.5% of GDP a year. In addition, a good slice of the additional EU spending on defence will flow Germany’s way - particularly for battlefield tanks, IFV’s, AFVs etc & Anti-aircraft defence systems.
I estimate the extra EU level defence spending at Euro 350 bn over the next 5 yrs Vs EU Commission estimates of Euro 750 bn. I do not expect more than 50% the fiscal space created by the EU Commission to be taken up by member states. And i have avoided double counting German defence spending.
But it is still a lot of money. This amount of defence spending would push European defence spending up by 25% p.a.(on top of the +/- Euro 400 bn defence sopending of the EU + non-EU European states today). That will bring the european total spending to 3%+ of GDP by after 5 years.
In addition, the break of US led alliances world wide will set off a global arms race as states previously sheltering under the US defence umbrella of one sort another will have to take their destiny into their own hands and boost defence capabilities radically. Defence contractors are today already at full cpacity and back-logged world-wide. So we are looking at a decade of demand exceding supply. Can't be bad for Germany - which is by far the biggest supplier of autonomous European weaponry.
Stay overweight German equities and defence stocks.