The growth potential of defense stocks in Europe has not been exhausted: large investors have not yet entered the sector in full, Bank of America says. It expects that the stimulus for the next wave of growth will be the arrival of classic "long money" - pension and other European funds that buy securities without short selling (long-only). They have softened their attitude toward arms manufacturers, but they are hampered by bureaucracy: funds need to update documents and notify clients before investing in the defense sector.

Details

European defense stocks may get a strong new impetus for growth as a surge in demand from long-only funds that have not yet invested in the defense sector is expected in the near future, Ben Heelan, head of BofA's European industrial sector analytics, told CNBC. According to him, many long-only funds, which previously avoided investments in the defense industry for ethical reasons, have softened their attitude to such assets, but there has been no mass rebalancing yet.

"From our observations, if you talk to some of these investors who were previously restricted from buying defense assets, now they are no longer restricted, but in order to buy these assets, they need to update all of the funds' documentation. They also need to notify their clients of their plans," Heelan explained.

A BofA analyst said his team analyzed the fund inflows situation a few weeks ago. "We estimate that the weighting of defense assets in [the portfolios of] European ESG funds has not changed much yet, which is very interesting. We believe that most of the rebalancing of European ESG fund assets is still to come," he said.

Heelan added that many defense stocks have risen in price simply on expectations of large orders from governments in the region, and suggested that the actual emergence of those orders could support the rally. "The orders in Germany will really start to add to companies' portfolios," the BofA analyst said. - "So we are now in a period where we have very high valuations in the short term because we expect a significant growth trajectory for the rest of this decade.

Context

The Stoxx Europe Aerospace and Defense index has grown by 50% since the beginning of 2025, with the growth leaders rising in price particularly strongly. Thus, quotations of the French company Exail Technologies, specializing in marine robotics, have soared by 560% since January. The securities of German defense contractors Renk, Rheinmetall and Hensoldt grew by 231%, 152% and 145%, respectively.

However, in the last three sessions, shares of European defense companies have been declining. The sell-off was prompted by the upcoming meeting between US President Donald Trump and his Russian counterpart Vladimir Putin, where the two leaders will discuss the terms of a ceasefire in Ukraine. In addition, hedge funds, which actively invested in the defense sector, have been selling shares over the past month to lock in profits made in the first half of 2025, said the BofA analyst.

The rally of European companies stalled in the summer as investors wait for the conversion of defense budget increases into real orders, as well as due to mixed quarterly results of industry players, Bloomberg wrote. Too high valuations in the sector are also a problem, the agency said. It advised investors to take a closer look at the U.S., where Northrop Grumman, L3Harris and General Dynamics reported better-than-expected results for the second quarter and raised their annual forecasts, as well as South Korea.

This article was AI-translated and verified by a human editor

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