European defense stocks fell to their lowest since April. Should we wait for a reversal?
Securities of German arms manufacturer Rheinmetall fell in price on Monday, November 24, on the Frankfurt Stock Exchange by 5%, and over the last five sessions - by more than 16%. Other European arms manufacturers Saab, Leonardo S, and BAE Systems also saw their share prices fall. Goldman Sachs' index portfolio of sector stocks is now about 25% below its early October peak and has fallen to its lowest levels since April. The recent drop in quotes has taken away the excessive excitement surrounding the powerful rally in European defense stocks that began around the end of February 2022, Bloomberg notes.
The reason for the fall in stocks was signals of progress in negotiations on a peace plan in Ukraine, the agency writes.
"Some investors increasingly believe the conflict will be resolved in the coming months following steps taken by President Trump's administration to appease Russia," Graham Benke, fund manager at Amati Global Investors, explained to Bloomberg. Nevertheless, "the conflict itself and the changing U.S. stance on NATO have led to a sustained shift in Europe's approach to defense spending that will not be revisited even if the conflict ends," he added.
Will the defense sector continue to decline?
European governments continue to increase military spending, Bloomberg notes. Mediobanca analysts led by Alessandro Pozzi estimate that a peace agreement on Ukraine is unlikely to be reached before the end of 2026. European defense spending, he said, will continue to grow.
The European defense sector is undervalued and has the potential to grow by more than 20% from current levels, according to Morningstar analyst Loredana Muharremi. "Valuations for European defense companies are based on structural increases in defense budgets across Europe rather than short-term gains related to Ukraine," Muharremi wrote in a note quoted by Bloomberg.
This article was AI-translated and verified by a human editor
