07 May 2026
- Since February's textbook "de-grossing" event in the run-up to the Iran conflict, leadership has already re-concentrated into semiconductors, AI infrastructure and energy-related capital expenditure (capex), consumer sectors, airlines and defence lagged.
- We believe the volatility gave investors opportunities to add exposure to high-conviction themes (AI, energy, HALO - Hard Assets, Low Obsolescence) where we believe earnings visibility remains strongest.
- Defence has been a surprise laggard, but in our view demand is rising - the sector now needs order conversion to compete for capital in a visibility-obsessed market.
- Airline stocks Ryanair and IAG have shown the greatest propensity to bounce in response to the latest peace-related headlines.
- Fundamentally the conflict has largely served to confirm existing global investment themes involving hard assets and hard power.
The February-March escalation in the Middle East triggered a sharp but short-lived dislocation in markets. Hedge funds de-grossed (cutting gross exposure by reducing both long and short exposures), momentum unwound and crowded positions were sold indiscriminately.
Yet by the end of April, markets had largely rebuilt the same exposures that were sold during the shock. Market leadership reasserted itself. Semiconductors, AI infrastructure, electrification and power were again at the top of the leaderboard. Traditional defensives, consumer and European domestic exposures lagged. Defence, despite the backdrop, also struggled.
The chart below ranks the relative performance of various thematic baskets compared to the MSCI Europe index for the three months spanning February to April 2026:
Excess returns vs index for thematic baskets:
Source: Bank of America, JP Morgan, Morgan Stanley, GAM, as at 30 April 2026
What worked: visibility over everything
The strongest performing areas since the start of the conflict have been those tied to AI and the broader “picks and shovels” capex cycle - semiconductors, data centre infrastructure, power and electrification. The common feature across these areas is growth with visibility.
Commentary we see from across the supply chain suggests that demand is committed and, in some cases, being pulled forward:
“Customers’ demand for the next three years far exceeds our current supply capacity… customers are bringing forward their demand for 2027 already.” (SK Hynix)1
“We already have customer commitments for a substantial portion of our 2026 capex.” (Amazon)2
In our view, this is a capex cycle with multi-year visibility. There have been plenty of moments of market doubt as to the sustainability of hyperscaler investment commitments over the last three years (the summer 2024 slump, early 2025's Deepseek moment, to name a couple), yet each time management teams have come out sounding more bullish than ever. In the context of a volatile, hedge fund-driven market structure, and with the Iran conflict pressuring other areas of the real economy, we believe the AI ecosystem has started to behave more like a defensive category.
What didn’t: defensives and defence
At the other end of the spectrum, traditional defensives underperformed. Consumer-facing sectors were particularly weak, as higher energy costs fed through into concerns around household affordability. We have taken a cautious view of consumer-facing sectors in recent years, reflecting aggressive pricing actions taken by companies through and beyond COVID and the Ukraine war. Iran-driven energy inflation adds to the growth-algorithm challenge faced by consumer companies (ie how to optimise price versus volume vs margin).
More surprising has been the recent weakness in European defence stocks, which are down meaningfully since the start of the conflict.
In our assessment, the fundamental backdrop has not deteriorated and, if anything, has strengthened. Order intake across the European defence complex has stepped up materially, with MBDA seeing annual orders increase from around EUR 4 billion to EUR 13 billion and backlog rising to EUR 44 billion3. At a company level, backlog coverage is historically high - BAE Systems now sits at around GBP 260 billion, close to 9x annual sales4. At a sovereign level, budgets are moving in the same direction, with Germany expected to reach circa EUR 145 billion (around 3.7% of GDP) by 2027.5
Management commentary reflects the same picture:
“The demand we see is structural… the deficits are known. Political decisions have been taken. Funding frameworks are in place.” (Hensoldt)6
But the nature of that demand is different.
“Demand is more than what we put in our backlog… but visibility of that becoming a firm net order backlog within the year is fairly minimal.” (Avio)7
The distinction with the AI capex cycle is one of timing. Defence demand is realised through discrete procurement decisions, often subject to political and administrative processes. It is visible in aggregate, but uneven in delivery. Concerns around the impact of rising sovereign yields on government budgets, plus narrative shift towards air defence from land defence should be noted, but in our view may, in part, reflect post hoc rationalisation of recent price action.
What the conflict actually enhanced
The Middle East shock did reinforce a number of themes.
Energy security and infrastructure investment remain front of mind. We have been increasingly positive on oilfield services since early 2026, where the need for capacity and resilience was already becoming increasingly clear prior to the Iran conflict.
The same applies to power, electrification and data infrastructure, all of which sit within our broader HALO framework.
Defence fits within that same structural story, but requires further catalysts to reinforce visibility of the cycle.
Where this leaves us
In our view, volatility around geopolitical events is increasingly driven by market structure rather than a change in underlying fundamentals. We regard the February de-grossing - as the market began to anticipate war - as a textbook example.
For long-only investors, the distinction between volatility and risk remains critical. In many cases, we believe the former has created opportunities to add to positions where the long-term investment case is unchanged or improving.
Defence is a good example. In our view, the demand backdrop is strengthening, positioning has reset and valuations have compressed. What is missing, for now, is the steady flow of order conversion that would bring it into line with the visibility seen in AI and related capex.
Tom O’Hara, Jamie Ross and David Barker manage European Equities strategies at GAM Investments. You can find out more information on the team here.