A defense company will be added to the EU blue chip index. It will replace the owner of Gucci

French luxury group Kering, which owns the brands Gucci, Saint Laurent and Balenciaga, will leave the Euro Stoxx 50 index, which is considered the European analog of the Dow Jones blue chip index. Instead of Kering, it will include the German defense concern Rheinmetall. Since the beginning of the year, its quotations have soared by 200% on the back of growing military spending in Europe, increased production capacity and a record order book;

German defense firm Rheinmetall will replace luxury Kering in the Euro Stoxx 50 index from June 20, the index developer said, its quoted Bloomberg. An exception was made for Rheinmetall - it was included via Fast Entry, an accelerated procedure that allows stocks to be added to the index outside the standard review schedule if their growth has been particularly rapid, noted Market Screener.

Since the military conflict between Russia and Ukraine began in February 2022, shares of Rheinmetall, Germany's largest arms manufacturer, have risen about 1,800%, Bloomberg calculated. This year alone, their value has added 200%. In particular, in May, the company's quotations jumped by 26%, and by the end of the month its market capitalization reached almost €87 billion ($98 billion), the agency notes. By this indicator Rheinmetall on May 30 was ahead of more than half of the current participants of the Euro Stoxx 50.

Kering shares have the opposite dynamics. In April, they reached the lowest level since 2016, Bloomberg writes. Since the beginning of the year, their value has fallen by almost 30%. The quotes of luxury manufacturers are pressured by the decline in consumer spending on the part of affluent Chinese buyers. Prospects for the industry deteriorated against the background of trade duties on imports to the United States, imposed by President Donald Trump. Even the top players - Hermès and LVMH - are showing weak results, though their problems are not as severe as Kering's. The company's revenues fell 14 percent in the first quarter from a year ago, and its flagship Gucci brand fell 25 percent.

Shares of Rheinmetall jumped 2.9 percent in momentary trading in Germany on June 3, while Kering decreased by 1.6 percent.

Inclusion in a widely tracked index could further boost investor interest in Rheinmetall shares, especially now that there is increasing interest in passive investment funds that are tied to stock indexes, Bloomberg writes. 

It is noteworthy that Rheinmetall will be the only company in the index that specializes only in the defense industry, the agency notes. Among the participants of the Stoxx 50 are luxury holding LVMH, aircraft manufacturer Airbus, chip equipment manufacturer ASML, the world's largest producer of enterprise management software SAP and others.

Rheinmetall has been one of the beneficiaries of a defense spending buildup in Europe amid the conflict between Russia and Ukraine and a reduction in U.S. military support. On Tuesday, June 2, the company's securities rose to an all-time high in stock exchange trading after Britain announced plans to expand its submarine fleet and strengthen its nuclear deterrent. 

Rheinmetall's revenue last year increased by 36% year-on-year to a record €9.75 billion in 2023. At the same time, the defense sector, which accounts for 80% of the company's sales, brought in 50% more. This year, the German concern expects revenue growth of 25-30%, and the operating margin, according to its forecast, will be 15.5%. Rheinmetall noted that it is "well-positioned to play a significant role in the upcoming increase in the defense capabilities of Germany and partner countries through security-related products." 

Last week, JPMorgan included defense companies among the top six ideas for investors in European stocks on a one-year to one-and-a-half-year horizon. "European defense spending could increase by 2-3.5% of GDP by the end of this decade," the bank's strategists said. Even if share prices now look overvalued after recent strong gains, according to JPMorgan, "earnings will meet expectations."

In March, amid investor interest in Europe launched the first exchange-traded fund focused exclusively on the defense sector - the WisdomTree Europe Defense Ucits ETF. The largest position in it is Rheinmetall, accounting for 18% of the portfolio.

Most Wall Street analysts' recommendations for the German concern's shares are to buy its securities: they have 15 Buy and Overweight ratings, shows WSJ. Two other analysts advise holding the company's shares; there is no advice to sell.

The majority of analysts suggest keeping Kering in the portfolio: 18 out of 27 of them, according to the data WSJ. Another five advise selling them (Underweight and Sell ratings), and only four advise buying them (Buy and Overweight). The average target price is €186, a 9% increase from the current price.