• The Ukraine war is winding down
  • Hopefully the peace settlement lasts
  • Nevertheless, defence stocks are a buy

Like a number of people my age, I’m a bit of an amateur military historian. I’ve read some of the classics of the genre, including Thucydides, Arrian, Tacitus, Polybius, Delbruck, Jomini and Clausewitz. As part of my schooling, I studied the US Civil War, the Spanish-American War and the major 20th-century conflicts.

One thing that stands out in all the above is just how unusual sweeping and sustainable victories really are. The Greeks defeated the Persians at Marathon, Thermopylae and Salamis. Yet the Spartans eventually allied with the Persians against the Athenians during the Peloponnesian War.

The Romans conquered much of Europe but never managed to subdue Germania, and the Goths eventually swept over much of the continent. Attila the Hun made peace and settled in Hungary. The Ottomans laid siege to Vienna only to eventually lose the Balkans entirely.

In the US Civil War, the Union overwhelmed the Confederacy in the end, but that merely sewed an existing country back together, and even then, not particularly robustly.

The Germans nearly reached Paris in 1914, only to eventually be driven back and, in desperation, signed an armistice that Hitler and others regarded as a “stab in the back”. They tried again on an even grander scale in 1939-43, but thereafter retreated on multiple fronts against ever-growing resistance.

The Korean War was a huge back-and-forth tussle over the entire peninsula, yet it ended in a stalemate more or less where it began. The Vietnam War, a colossal rumble in the jungle, destroyed much of the country, which the country subsequently spent decades rebuilding in the aftermath.

In early 2022, when it appeared that war might be imminent in Ukraine, I took what lessons I could from all the above and tried to apply some strategic thinking to how things might play out. (Some of my initial thoughts were presented in this video with Boaz Shoshan here.)

In brief, given the terrain involved and the fact that both sides had access to advanced missile technology, rendering battlefield air support essentially impotent, it seemed likely to me that the war would be a quite conventional one in terms of attrition. Artillery and other mostly traditional weapons systems would dominate the battlefield.

As Jomini, in particular, instructs, when it comes to an attritive battle, what really matters is logistics. How long are the supply lines? Are they secure from flanking attacks? How many soldiers can you bring and maintain in the field? How quickly can you produce artillery shells and service the big guns needed to fire them?

And so, looking at the geography, one could see quite clearly that the Russians would have the upper hand. NATO might have promised Kiev massive support in terms of money and various modern “Wunderwaffen” but the fact that the battlefield of Donbass was already encircled by Russia — including fortress Crimea and friendly Belarus — and that Russia could probably put at least five times more soldiers and artillery into the field implied Russia would win.

The cost of victory was less clear and remains so. But multiple recent reports indicate that the operational phase of this war is essentially over. Barring a huge (and highly unlikely, in my opinion) escalation by NATO to become directly involved in the war, Russia has won. The drama will now play out around the negotiating table.

I’m not sure what the settlement will look like, but Russia will most probably demand formal recognition of its sovereignty over Crimea and the four Donbass oblasts as Russian. They might agree to some sort of demilitarisation in exchange, but probably only if Ukraine does the same east of the Dnieper River.

In total, this would cede territory roughly the size of England, from Ukraine to Russia. While that might sound like a lot, consider that were the war to continue, with Russia eventually occupying the bulk of Ukraine, they would have seized territory comparable in size to all of Europe west of the Rhine River.

If negotiations fail and hostilities resume, it will be a disaster for Ukraine and, by implication, much of Eastern Europe, which will have a massive refugee problem to deal with.

If, however, a deal is reached, then the financial markets are likely to breathe a major sigh of relief. Russia will almost certainly insist that all economic sanctions are lifted as part of any settlement and, in turn, Ukraine will insist that freedom of Black Sea navigation is fully restored.

Both sides will set about rebuilding. Combined with the lifting of sanctions, this will be a huge boon to not only the regional but global economies. Funds will pour in from just about everywhere and Ukrainian grain, chemical fertiliser and other valuable exports will be shipped out. But that all depends on the peace settlement being perceived as sustainable in the long term.

One investment theme we here at Southbank Investment Research have been pushing all year is that of defence. Could it be that, with the end of hostilities in Ukraine, defence stocks are in for a correction?

While that might indeed be the knee-jerk reaction, I would look to jump in and buy on any major dip. Why? Do I think that a peace settlement won’t hold?

No, I think it will. But it will hold in part because of what I believe is likely to be a general European rearmament following the largest conflict on the continent for nearly 80 years.

Europeans have just relearned a lesson in classic balance-of-power politics. Large imbalances lead to conflict and, once balance is restored, peace becomes sustainable.

In 1917, the US ended its isolation and entered WWI. The same happened again in 1941. Soviet aggression in the 1950s and 1960s was met with massive US responses, including explicit nuclear threats.

What the war in Ukraine demonstrates is that, after over a century of being able to depend on the US to provide balance vis-à-vis Russia, Europe is going to need to be able to defend itself once again. Practically, this is going to require a decade or more of US-level defence spending. It might even require the UK and France to work with Germany and others to modernise and expand their nuclear deterrent capability.

Casting my eyes around the world, I see simmering conflicts in multiple regions. If the US is cowed by its implied defeat in Ukraine and some form of neo-isolationism continues to grow in political appeal, then you can bet that many countries previously depending on the US policeman to keep the peace are going to take things into their own hands, for better or worse.

All of the above is positive for the defence industry. In the Southbank Wealth Advantage model portfolio, we have a position in this sector. It has been one of the best performers to date. Yes, it might suffer a knee-jerk drop in the event peace breaks out in Ukraine. But as Southbank Wealth Advantage is an investment and portfolio construction service rather than a trading service, I’m not going to get caught up in the noise.

In the classic anti-war film Apocalypse Now, Colonel Kilgore, seen clearly to love war (and surfing), laments that, “Someday this war’s gonna end.”

As with many anti-war films, Apocalypse Now explores the dark side of human nature. With nature being what it is, the world has always been a dangerous place.

Pax Americana was a historical aberration lasting but a few generations. The same was true of Alexander the Great’s vast empire and many others through the ages. If there is one constant in international politics, it is that peace is best achieved through a combination of strength and a balance of power. Europe and a handful of other regions around the world currently have neither.

Until next time,

John Butler
Investment Director, Fortune & Freedom

PS Past lessons can help us plan for the future – and right now, my colleague Sam Volkering sees that future with a distinctive artificial intelligence (AI) edge. It pays to be ahead of the game and Sam has just released his new AI-powered investment advisory to help you to do just that. You can find out all about it right here.