Ukraine's Zelenskiy: changes under way in air defence, other areas

President Volodymyr Zelenskiy convened top military leaders to address shortcomings in Ukraine's air defences, saying regional air-defence teams, interceptors and mobile fire units are being practically rebuilt, and reiterated appeals to Western allies for more weapons to counter missiles and drones. He also criticized local officials over failures to restore power and heating after strikes—highlighting outages in Kyiv, Kharkiv, Poltava and parts of Odesa—and warned officials will be held personally accountable, underscoring persistent civilian infrastructure strain and likely continued demand for defence and energy-recovery support.

Analysis

Market structure: Immediate winners are Western defence primes (RTX, LMT, NOC, GD) and defence-focused ETFs (PPA) as demand for SAMs/interceptors, seekers and mobile launchers increases; losers include Ukrainian utilities/energy providers, regional insurers and rebuild contractors facing cashflow stress. Supply/demand signals point to a multi-quarter shortage: interceptors and guided munitions lead-times likely extend 6–18 months, supporting higher realizable pricing and margin resilience for manufacturers. Cross-asset: expect upward pressure on European gas/power and spot oil (+5–15% tail-risk swing), a modest risk-off bid into USD and US Treasuries (2–5bps lower yields) and elevated FX volatility for UAH and neighboring EM currencies.

Risk assessment: Tail risks include a major escalation provoking NATO involvement or a strategic strike on European energy infrastructure — low probability but would add >20% volatility across energy and defence equities. Time horizons: immediate (days) = volatility spikes and knee-jerk flows; short-term (weeks–months) = aid approvals and winter outages drive sector returns; long-term (quarters–years) = sustained rearmament and reconstruction capex. Hidden dependencies: US/EU political timelines (Congress/Council votes within 30–90 days), semiconductor/seeker supply bottlenecks and logistics constraints that can cap order fulfillment. Catalysts to watch: next 60 days’ US aid vote, any major Russian strategic strike, and European gas storage/demand shocks.

Trade implications: Direct plays: establish 2–3% portfolio long positions in RTX and LMT (equal-weight), target +20–30% upside over 6–12 months, stop -10%. Use PPA (Invesco Aerospace & Defense ETF) to scale exposure (3–5% position) and implement 6-month call spreads on RTX (buy 20% ITM/ sell 40% OTM) to leverage with defined risk. Pair trade: long PPA (1.5–3%) vs short JETS (U.S. Global Jets ETF) 1–1 to capture relative defence vs travel re-risk; take profits if differential widens by 25%. Energy: size a tactical 1% long position in front-month TTF/gas exposure or Brent swaps if European outages materialize; exit if TTF < €40/MWh or Brent < $70/barrel.

Contrarian angles: Consensus overweights large primes but underestimates small specialized suppliers and European utilities/contractors that will win reconstruction work; consider rotating 30–50% of defence-ETF gains into smaller suppliers (LHX, TDY) after 2–3 months if order backlogs persist. The market may be pricing a rapid production ramp — if critical component shortages remain, primes could miss delivery targets and underperform by 10–20%, so hedge with 3–6 month protective puts (~ -8% portfolio cap). Historical parallel: post‑2014 rearmament delivered multi-year returns but only after 6–12 month procurement clarity; primary risk to trades is failure of Western funding votes within 60 days.

Key Decisions for Investors

• Establish a 2–3% net long position split equally between RTX and LMT within 2 weeks; size for a 6–12 month horizon, target +20–30% upside, set stop-loss at -10%.
• Allocate 3–5% to PPA (Invesco Aerospace & Defense ETF) immediately; hedge 30–50% of that position with 6‑month call spreads on RTX (buy 20% ITM / sell 40% OTM) sized to cap downside to ~ -3% portfolio exposure.
• Implement a market-neutral pair: long PPA (1.5–3%) vs short JETS (U.S. Global Jets ETF) equal notional within 10 trading days to capture defence vs travel divergence; close if spread widens by 25% or within 6 months.
• Establish a 1% tactical long in European gas exposure (TTF-linked instrument or Brent if TTF illiquid) if TTF > €45/MWh or Brent > $80; trim/exit if TTF drops below €40/MWh or Brent under $70 within 3 months.
• If US/EU aid votes are delayed beyond 60 days, reduce gross defence equity exposure by 30% and buy 3–6 month protective puts on remaining positions (target cost <2% portfolio) to guard against a 10–20% downside gap.