(Nov 24): A key driver of this year’s gains in European stocks is falling back fast.
Rheinmetall AG and other defence names resumed recent declines on Monday amid signs of progress in talks to secure Ukraine’s support for a US-backed peace plan ahead of Thursday’s deadline. A Goldman Sachs Group Inc basket of the stocks is now down about 24% from its early October peak.
According to Graeme Bencke, a fund manager at Amati Global Investors Ltd, there’s been a change in market sentiment toward the Russian conflict in Ukraine.
“Some investors increasingly believe the conflict will be resolved in the coming months after actions taken by the Trump administration to appease Russia,” he wrote in emailed comments. Still, “the conflict, and the US attitude change towards Nato, has led to a permanent shift in Europe’s approach to defence spending which will not reverse even if the conflict ends,” he said.
While progress is not expected to be imminent — German Chancellor Friedrich Merz on Monday said not to expect a breakthrough this week — the recent declines have taken the froth off a huge rally in European defence stocks that began around the time Russia invaded Ukraine in February 2022.
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The gains extended this year as European governments have rushed to boost military spending.
According to Mediobanca analysts led by Alessandro Pozzi, a Ukraine peace agreement is unlikely to happen before late 2026. Defence spending in Europe is poised to continue rising, he wrote in a note.
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For Morningstar Inc analyst Loredana Muharremi, the European defence sector is undervalued, with the potential to rise more than 20% from current levels. “European defence valuations are underpinned by structural increases in defence budgets across Europe, rather than by short-term revenues from Ukraine,” Muharremi said in an email.
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