Regardless of whether officials can ultimately find a way to stop the war in Ukraine, the bull market in European defense stocks is far from over, market watchers say. On Tuesday, Axios reported that a secret peace deal was being worked out by Washington and Moscow, with some news outlets reporting that a breakthrough could be imminent. However, some reports have suggested that the deal could force Ukraine to make concessions on land it has occupied since Russia’s full-scale invasion in early 2022 and give up some of its weapons. Ukrainian President Volodymyr Zelenskiy has previously rejected the idea of his country handing over land to Russia to end the war. Amidst rumors flying around this week, US Secretary of State Marco Rubio shed light on progress towards the Ukraine peace plan on social media platform X. “Ending a war as complex and deadly as the Ukraine war requires a broad exchange of serious and pragmatic ideas,” he said in a post late Wednesday. “And achieving a lasting peace will require both sides to agree to difficult but necessary concessions. That’s why we have and will continue to develop, based on input from both sides of this conflict, a list of potential ideas to end this war.”European defense stocks fell after the press release, even as European stocks generally showed signs of recovering from four days of losses. From Monday to Wednesday, the Stoxx European Aerospace and Defense index fell 3.8%, but rebounded on Thursday and was up more than 2% by early afternoon trading in London. The index has risen more than 50% since the start of the year after European governments and the North Atlantic Treaty Organization (NATO) military alliance pledged to significantly increase defense spending. The pledge is widely expected to boost profits for European companies, with companies headquartered in the region already reporting record order backlogs and big increases in revenue. Defense Rally This week, market participants told CNBC that Europe’s defense sector will be on the upswing no matter how long the Ukraine war drags on, despite the volatile situation amid growing reports that a peace deal could be imminent. Michael Field, Morningstar’s chief equity strategist, said on a CNBC conference call that investors should ignore the noise and take a long-term view on defense. “Their order book is full. The replenishment story is there,” he explained. “Even if the Ukraine war ended tomorrow, it would take 10 years for countries like Germany to replenish all the weapons they gave Ukraine. And that doesn’t include all the other bad things going on in the world.” EU countries and institutions have collectively earmarked more than 65 billion euros ($74.8 billion) in military aid to Kiev, according to the Kiel Institute’s Ukraine aid tracker, last updated in October. According to the data, 17.7 billion euros have been allocated to Germany alone. Field also noted that European countries are preparing for a security splurge, which Morningstar sees as further benefiting big companies like Germany’s Rheinmetall (whose stock has already more than doubled this year) and Britain’s BAE Systems. “There are tremendous structural tailwinds affecting the industry,” he said. “This is not a short-term story, it’s a medium- to long-term story. We think the market hasn’t fully accepted that yet.” Mr. Field argued that despite strong growth in European defense personnel this year, stocks still need to rise further. “These aren’t things like AI names, they’re physical products being sold, so it’s hard to conceptualize how much more valuable they are today than they were a year ago,” Field said. ”[But] Bill Farmer, managing director at investment bank Brown, Gibbons, Lang & Co., said any deal would likely cause short-term volatility in the sector, but was unlikely to put defense companies on a completely new trajectory. “The low likelihood of a long-term peace deal could initially cause a pause in the rise in NATO defense stocks and slow orders and production for a variety of missiles and weapons.” “However, we believe that NATO countries are committed to increasing defense spending in line with 5% of GDP,” Farmer told CNBC in an email Thursday. “This increase will help deter future offensive actions by Russia, Iran, China, and others.” Claire Titmarsh, defense equity analyst at Rathbones, Meanhill, told CNBC that the impact of the peace deal will depend on the terms of the deal. “It seems unlikely that we will completely eliminate the risk of future invasions,” he said. Analysts previously told CNBC that European countries will continue to feel the need to protect themselves from Russia even after the Ukraine war ends. “Given everything that’s happened with Ukraine and its aggressive neighbors to the east, it’s hard for me to see how that could happen even if a reasonable ceasefire or peace agreement could be reached with Ukraine.” [governments] “We’ll pull out and say it’s over,” Mikael Johansson, CEO of Swedish defense giant Saab, said in an interview with CNBC in late July. But regardless of the outcome, Titmarsh said the structural drivers behind Europe’s defense spending would remain intact. These include decades of underinvestment, the push for strategic autonomy, the need for modernization, and NATO’s commitment to increasing defense spending targets, she said. “We will accelerate investment in automation and unmanned systems to ensure sustained demand for defense capabilities regardless of the possibility of a peace agreement between Russia and Ukraine,” she added.
