The defense and aeronautics sector is experiencing its golden age on the stock market in Europe. A little over a year after the start of the Russian invasion of Ukraine, this sector takes cruising speed on the stock markets. The Stoxx Europe Total Market Aerospace & Defense closed this Monday at a scant 0.3% of its all-time high (1,081 points), up to 1,077 points at market close this Monday. To find a similar level, you have to go back to February 2022, just before the stock market crash due to the pandemic. Since those lows, its revaluation has exceeded 136% in the face of investor interest in companies related to this field.
The index has added to the tailwinds blowing the market over the past eight weeks. Only so far this year has this index accumulated an ‘acceleration’ of more than 15%, in line with the rise in the FTSE MIB (+15.7%) and above reference indices in the Old Continent such as the Ibex 35 ( +13.1%), the French CAC (+12.7%) or the German Dax (+10.5%). The Euro Stoxx 50, for its part, rebounds almost 12% with market closing data this Monday. Since February 24, 2022, marked on the calendar as the beginning of the war conflict at the gates of Europe, it has shot up 25%, a rise that has been consolidated in the last five months.
The increase in military spending by world powers, either to help those involved in the war or to renew equipment, has led to an increase in the attractiveness of companies engaged in this activity in the eyes of investors. “Defense stocks have outperformed markets well, and their valuations are now trading at a 20-30% premium,” precisely eToro markets strategy Ben Laidler.
The expert defends his commitment to these values and sees “probably that these gains will continue to be well supported” in the light of Russia’s decision to suspend its participation in the New Strategic Arms Reduction Treaty (START) and the Chinese spy drones that fly over the United States sky. The XTB analyst, Joaquín Robles, is somewhat more skeptical, who expects a precision stage and recommends an investment strategy in the diversified defense area that includes the most representative companies in the sector.
You bounce a digital triple
Among the list of winners in the stock market as a result of the war is Rheinmetall, whose shares experienced a rebound of 152%, up to 243 euros between February 23, 2022 and February 27, 2023. The German arms giant and manufacturer of the controversial Leopard tanks has hit the stock market after the announcement of the European plan to send these tanks to Ukraine. Analysts surrender to this value, with 86% buy recommendations and no sell ones.
Other firms such as Thales also appear on this map of the military industry. The French group’s titles have appreciated 58% since February 2022 and are already trading at 133 euros, an increase that brings it closer to its twelve-month target price (143 euros), although Berenberg or JPMorgan see it trading above 155 euros Also noteworthy is the French aeronautics company Airbus, which, although it lags behind the ‘rally’ of other companies, has accumulated an increase of 11.8% in the last eight weeks. Safran, another French giant, scores a 15% rise from the start of 2023.
The advances of the British BAE Systems (+44% in one year) are also significant, a rise supported by analysts. The Bloomberg consensus gives you 65% buy advice, versus 10% sell. Société Generale stands out, which has revised this value upwards and believes that it can be listed at 1,086 euros.
Although global defense spending has fallen by around 65% from Cold War highs in the 1960s, rising geopolitical tensions, and especially the Russia-Ukraine front, have fueled the need to invest. more in military spending. At the end of 2021 (latest data available), this amounted to 2.2% of global GDP, according to information collected by the World Bank. The United States leads the way, with a budget of around 800,000 million dollars, which represents around 3.5% of its economy.
In recent months, NATO has reiterated to its members the need to raise their military spending above 2%, an objective that Spain intends to reach in 2029 through the progressive increase in this item. In the European Union as a whole it is also below 2%, as in China, where in 2022 they already revealed their intention to strengthen themselves in this regard, while in Russia it was already 4% in 2021, a figure that has been strengthened as a result of its ‘special military operation’ a year ago.