The early stories of the peace deal in Ukraine are unlikely to halt extraordinary European and British defence stock rallies. If anything, experts say the sector could be further strengthened as details of the national defense spending plan arrive at the market.
Political events in Europe means that Morningstar analysts are increasing the fair value estimates of key defense stocks like the BAE system ba.in that case it is significantly more likely.
This week, US President Donald Trump warned that President Vladimir Putin would seek revenge for a secret Ukrainian drone mission in which he reportedly destroyed billions of dollars in Russian aerospace assets. This week, British Prime Minister Kiel Starmer said defence spending needs to be adapted.Preparation for battle”cites the growing threat from Russia. Short-term peace seems unlikely.
Morningstar Industrials and aerospace analyst Nicolas Owens maintain forecasts of a significant increase in European defence spending.
“We see $20 billion in funding for research and development and military procurement in NATO countries over the next decade,” he says. “This will defend the contracting company’s backlog regardless of when and how the Ukrainian conflict is resolved.”
Why did defense stocks rise so sharply?
The importance of European defence stocks is Complete Ukraine invasion in 2022. The defense perspective has changed rapidly. Some commentators discussed Arms companies must be included in their ESG portfolio. The rise in ESG funds continued to reveal weapons stocks. Hamas’ escalation in the Middle East in October 2023 was also added to global fears of conflict.
By November 2024, when Donald Trump took the White House for the second time, it was already there Speculation about his country’s relationship with NATO with European allies. Subsequent political events show that the US has very limited tolerance towards the status quo.
Everything I contributed A sparkling stock price rally Investors loaded stocks and were deemed to be profitable from fears of re-contracts and national security.
Every year, Germany’s major defense company Rhinemetal rhm It’s up nearly 200% among Italian fellow Leonardo ldo It rose 103% on the euro terms. British Defense Manufacturer BAE System ba. It has increased by more than 68%. Rolls-Royce RR.April was volatile for commercial aviation manufacturers with global exposure to demand for submarines and air force engines. Still, its stock price is rising 50% per year.
If there is a continuing brutal conflict in Ukraine and the Middle East, or if it settles, will the momentum end?
“The war in Ukraine brought three strong defence stocks to the forefront. Once the war in Ukraine ends, they all remain prominent,” says Owens.
“First, prolonged ground combat underestimates the speed at which western military planners consume shells, resulting in an increase in orders to replenish and increase the capacity of these traditional weapons.
“Secondly, innovative military tactics and equipment highlighted the importance of low-cost network sensors and ammunition, especially drones, for modern warfare.
“And most importantly, the Ukrainian invasion forced European countries to reassess the level of investment and preparation for armed conflicts or their deterrence.”
Cerez-fire: A mid-term defense opportunity?
At this stage it is unclear whether a peace agreement is possible, not only sustainable.
However, a short-term ceasefire is possible. This could be good for defense companies, big and small, according to a defense consultant who is well versed in UK-Aukraine military cooperation.
In their view, a long-term ceasefire will present two important opportunities for defense companies. The first is logistics.
Since February 2022, the Ukrainian Army and Air Force have learned how difficult it is to maintain an effective supply chain that is 817 miles wide, and how difficult it is to maintain a wide range of combat vehicles field, including the vast combat vehicles from various sources from the former Soviet Union.
Maintaining this equipment and the patchwork of Matteriel can be made easy in the breathing space provided by the ceasefire. The second opportunity is commercial.
Currently, Western product contracts provide that certain repairs must be performed by manufacturers rather than military mechanics. This is a change that was engulfed during the global war with terrorism that took time to embed in Ukraine. Western civilian defense experts may need the relative safety of a ceasefire to do more work within the country.
A new era of defense cooperation?
The possibility of a ceasefire is not the only tailwind for European defence companies. Europe is revitalized anyway. Amidst the economic turmoil brought about by tariffs, Morningstar analysts point to an increase in European political cooperation as a boon from defence stocks.
“If tariffs are expanded to defense-related products, the main impact on US defense companies is expected to decrease. Increased production costs and procurement prices for the US Department of Defense and allied buyers in Europe.”
“ Given the need to bridge the gap between current geopolitical dynamics and European defence capabilities, the possibility of retaliatory tariffs targeting US defence exports is limited.
“However, the sustained protectionist attitude from the US could reduce the competitiveness of its platform over time and accelerate intra-European integration.”
Protecting the supply chain through onshoring is also important. April, BAE System ba.partly producing artillery and small arms ammunition for the UK Department of Defense, announced an overhaul of the manufacturing industry.
Now, smaller facilities will be operating continuously to protect the supply chain of explosives and propellant from price fluctuations overseas.
Such a move comes as the UK itself Renegotiate relations with the European Union. In May, British Prime Minister Kiel Starmer announced that the formal post-Brexit contract had been hit by the political bloc on the continent. This includes access to European security action (safety) schemes by British arms companies.
In the wake of the agreement, Muharemi has significantly increased its fair value estimate of BAE shares from £15.50 to £22.50 per share. She says the fund is too small to fully satisfy European defence ambitions, but she says it is a very clear victory for British defence.
“Preferably, this framework opens up participation in non-EU contractors,” she says.
“UK companies such as BAE Systems and Rolls-Royce, previously excluded from the European Defense Fund, are expected to have access to funding through new bilateral UK security agreements, with details expected to be finalized (soon), if the procurement threshold is met.
“This is a clear victory for the UK industry and the broader EU competency targets.”
