What’s Ahead
- Investors are downbeat on European equities, but recent price action points to significant upward momentum across the euro area.
- Defense stocks have performed particularly well as the U.S. ramps up pressure on Europe to foot more of the global defense bill.
- Gain exposure to what could be a burgeoning niche of the international stock market with Structured Notes.
A recent survey by Bank of America Global Research found that 87% of wealth managers are bullish about U.S. stocks. This is the highest number ever recorded. Since the polling took place from January 21 to February 4, 2025, the bias for U.S. stocks stems from strong returns not only from the Magnificent Seven stocks, but also the S&P 500 overall.
The same survey found that 44% of advisors were bearish on European equities, with just 12% optimistic about returns across the euro area over the near term. The 32% net bearish reading is the highest since 2019, according to the BofA survey.
BofA Global Wealth & Investment Management Survey: Low Expectations for Europe
What have returns been like so far in 2025? The scoreboard is Europe 1, USA 0.
Through February 27, the Euro Stoxx 50 Index, a broad gauge of the regionโs stock market, was up 12%. Zooming in on the continentโs biggest economic powerhouse, Germany, we find that the Xetra DAX is also higher by more than 10% year to date. Barclays notes that 2025โs early-year return is among the DAXโs best in history.
The German DAX Is Off to a Strong Start in 2025
So, amid all the โrah-rahโ for U.S. stocks, international markets (namely whatโs going on in Germany) have been the better performers about two months into the year. What could be driving this surprising strength in non-U.S. equities? Sentiment and positioning play a role, but thereโs also a bullish backdrop for German defense companies, perhaps thanks to President Trumpโs stern stance that Europe should bolster its investment in defense against foreign adversaries and regarding Ukraine.
President Trumpโs Hard Line
The POTUS has been outspoken in demanding that NATO raise its spending target to a larger percentage of the European Unionโs GDP. EU member statesโ defense investment is expected to have risen 30%, to 326 billion euros, in 2024, and that appears to have benefited Europeโs biggest aerospace & defense companies. Under Trumpโs plan, total upgrades, including support for Ukraine, may cost upwards of three trillion euros over the next 10 years, according to Bloomberg Economics.
High Momentum: Europeโs Aerospace & Defense Stocks Soar
It’s clear that geopolitical realignment is occurring today. Investors have turned fearful, tooโjust take a look at some of the recent sentiment surveys, including an AAII gauge of investor optimism produced in late February. It tallied nearly the most net bears since March of 2009. As feelings about where stocks are headed ebb, and as geopolitical tensions rise, investors may seek innovative strategies to navigate potential market volatility.
Structured Notes for High-Yield Potential
Structured Notes have the potential to be a critical tool for managing risk while capturing upside potential and generating high income. They can also be used as a Swiss Army Knife of sorts for pouncing on macro changes. Among such shifts is the resurgence of Germany as a defense and energy stalwart. We assert that Structured Notes priced off several of Germanyโs industrial firms can be a practical way to help safeguard investor portfolios from geopolitical risks and provide a potentially large income stream.
Why German Defense Now?
Itโs important to step back and understand why allocating to German defense companies could make sense today. You see, Germany has historically played a central role in Europeโs stability. Today, changes are underway, spurred by the 2022 “Zeitenwende” pledge of $110 billion to modernize its military. Data reveals that the country has already increased its defense spending to 2% of GDP in 2024, with increases possible on the horizon. Whatโs more, the U.S. has pressured Chancellor Scholz to increase Germanyโs investment in national and continental defense.
Structured Notes on ThyssenKrupp, Siemens Energy, Rheinmetall Defence, and BASF can be an effective investment strategy to capture a specific return in a risk-centered way. For those unfamiliar with Structured Notes, they are a combination of a zero-coupon bond with an options package that offer a preset expected return at maturity, a level of downside protection, and are linked to some underlying asset. Most Notes mature within six months to 20 years, though most are on the shorter end of that range. They allow investors to gain greater control over their portfolios with defined outcomes.
Structured Note Details
For this German defense, energy, and industrial investment idea, we are using Income Notes. Income Notes differ from Growth Notes in that the noteholder receives a fixed payment, known as a coupon, while not participating in upside returns. Income Notes may generate a higher income stream than a standard bond or high-yield stock, and periodic coupon payments are generally dependent on certain conditions being met.
Here are the Income Notes included in this investment idea:
- ThyssenKrupp: 12-month term, 15% soft principal protection, 15% coupon protection; annualized yield of 37.6%
- Siemens Energy: 12-month term, 30% soft principal protection, 30% coupon protection; annualized yield of 35.4%
- Rheinmetall: 12-month term, 15% soft principal protection, 15% coupon protection; annualized yield of 30.0%
- BASF: 12-month term, 15% soft principal protection, 15% coupon protection; 21.5% annualized yield
All four Structured Notes are autocallable and contingent, meaning the issuer can repurchase the Notes at a predetermined call price before maturity, and periodic coupon payments are conditional on the underlying assetโs price at regular intervals.
The above products also feature โsoftโ protection, which means if the underlier falls below that threshold, the holder is exposed to losses, but above it, the principal remains intact.
German Defense & Industrial Note Ideas
Source: Halo Investing. For illustrative purposes only. Indicative pricing as of 3/7/2025. Changes to terms and pricing should be expected. The information does not constitute a recommendation from Halo Investing. There is no guarantee that these objectives will be met.
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Blue-Chip Companies
As Germany ramps up its military investment, Notes linked to Rheinmetall and ThyssenKrupp can provide exposure to the suddenly in-vogue defense niche of Europeโs biggest economy. Furthermore, thereโs an immediate need for Germany and much of continental Europe to pivot away from energy dependence on Russia, so Notes linked to Siemens Energy offer direct exposure to that trend. Finally, BASF is a multinational conglomerate in the Materials sector that could benefit from increased investment.
The Bottom Line
Together, these Note ideas have the potential to be a winning portfolio strategy for investors seeking exposure to an area of the market showing increased momentum. In an era of escalating global uncertainty, including geopolitical tensions, economic shifts, and episodic volatility, differentiated strategies away from large-cap U.S. stocks may be ideal. As Germany doubles down on its defense and capital investments, reallocating via the Structured Note vehicle can add to portfolio stability given large possible income returns with limited downside exposure.
About the author
Michael Muth
Hoplon Capital Management
Michael Muth is Founder & Portfolio Manager for Hoplon Capital Management, an active structured note manager, specializing in European Markets, for wealthy individuals and family offices. He can be reached at muth@hoploncapitalmanagement.com.
Please see our Halo Disclosure Page for important disclosures.
An investment in Structured Notes may not be suitable for all investors. These investments involve substantial risks. The appropriateness of a particular investment or strategy will depend on an investorโs individual circumstances and objectives.
Content and any tools discussed are provided for educational and information purposes only. Halo Investing makes no investment recommendations and does not provide financial, tax, or legal advice. Any structured product or financial security discussed is for illustrative purposes only and are not intended to portray a recommendation to buy or sell a particular product or service.
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