Ian Cowie: a half-price trust winning from Europe’s defence revival

Repeated warnings that protecting Europe is no longer America’s foreign policy priority, as the world’s biggest economy pivots towards Asia, have sent continental countries’ defence expenditure soaring into the stratosphere.

Earlier this week, JD Vance, the US vice-president, said: “The reality is that Europe’s security infrastructure, for my entire life, has been subsidised by the United States of America,” before he added that we cannot be “a permanent security vassal of the United States”.

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No wonder Prime Minister Keir Starmer has pledged to boost Britain’s defence spending to 2.5% of our gross domestic product (GDP) – a measure of economic output – by 2027. Elsewhere in Europe, the German Bundestag recently voted to scrap its usual budgetary restrictions and spend an extra €500 billion (£420 billion) on its defence against an increasingly aggressive Russia.

This additional demand should help a wide range of arms manufacturers across the Continent but I don’t know which ones will do best. That’s why I have invested in Seraphim Space Investment Trust Ord (LSE:SSIT) where three-quarters of net asset value (NAV) is defence-related and two-thirds of NAV is invested in Europe, including the United Kingdom.

Better still from the point of view of interactive investor readers today, although it was only last month that I paid 53p per share, chaotic market conditions since then – with America imposing punitive tariffs before pausing some of them, depending on the whims of President Donald Trump – have seen SSIT’s share price briefly slip below 50p before partially recovering to 52p on Wednesday. So, you can’t say I only tell you about my winners.

More positively, with “eyes in the skies” proving increasingly important in modern warfare, I expect SSIT’s military satellites and associated services to provide geographic diversity to my ongoing shareholding in Edinburgh Worldwide Ord (LSE:EWI), the investment trust where 11% of NAV is invested in Elon Musk’s Space Exploration Technologies. SpaceX has successfully lifted more than 7,000 Starlink satellites into low Earth orbit (LEO), where “latency”– or the delay between signals being sent and received – is minimal, which can be vital for military purposes.

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You could argue that Musk inadvertently drummed up business for European high-technology defence companies when he said that the struggle against Russian invaders would collapse if he turned off the Ukrainians’ Starlink access,although he has also stressed that he would never turn off the terminals.So, it is no more than prudent for Europeans to question the value of buying American kit that could be turned off just when we need it.

No such worries apply to SSIT’s three biggest underlying holdings, which account for half its £240 million total assets. The fund’s biggest underlying holding is ICEYE, a Finnish manufacturer of micro-satellites that claims to be the world leader in a specialist form of radar; “synthetic aperture imaging”, since you ask.

Ranking second, D-Orbit is an Italian maker of space tugs, more formally known as “orbital transfer vehicles”, that can move stuff around in the skies and might also disable unfriendly satellites. ALL.SPACE is based in Reading, Berkshire, where it makes military-grade communication systems which, reassuringly,  cannot be turned off by an enemy or former ally.

Mark Boggett, chief executive of SSIT, told me: “Europe must turn to a burgeoning number of space companies on the Continent that can grow to become its own SpaceX and Starlink equivalents to quickly bridge gaps in defence capabilities.

“Companies such as the German launch firm ISAR Aerospace, satellite intelligence firms like Finland’s ICEYE and Britain’s SatVu, alongside communications businesses such as Spain’s Satelliot can all play a leading role.

“Meanwhile, satellite manufacturers like Germany’s Reflex Aerospace and Britain’s Open Cosmos will be vital in ensuring Europe's satellite constellations keep up with and challenge the levels of the US and China.”

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It’s only fair to add that I have painful, personal experience of so-called moonshot investments elsewhere that can go up like a rocket before falling to Earth like a stick. But the investment trust structure automatically diminishes risk by diversification and, as a closed-end fund, avoids the danger of the managers being forced to sell assets to meet redemptions.

Better still for contrarians who like to buy when others sell, SSIT currently trades at an eye-stretching 51% discount to its NAV. So, buyers today could bag a buy one, get one free, or BOGOF deal.

Nobody should invest without carefully considering how we will feel if prices fall. But it’s an ill-wind that blows no good and this investment trust’s exposure to European communications and defence technologies might yet offer bargains for the brave.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Edinburgh Worldwide (EWI) and Seraphim Space Investment Trust (SSIT) as part of a globally diversified portfolio of investment trusts and other shares.