(BFM Bourse) – All of the values in the sector in Europe fell on Monday following the events that took place in Russia this weekend. Investors speculate on an acceleration of the end of the conflict in Ukraine, which is perceived negatively for the sector.
Geopolitics still dictates the tempo for defense sector stocks on the stock market. At the end of the morning on Monday, Dassault Aviation dropped 2.1% and Thales fell 1.6%, while the CAC 40 was almost stable (+0.03%). Both stocks saw falls of up to almost 5% and 4% respectively in the morning. In London BAE Systems dropped 2.2% while in Frankfurt, Rheinmetall, which supplies armored vehicles to the German army, lost 4.2%. The group from across the Rhine saw its price double last year and entered the DAX 40 in April.
This downward movement seems to be linked to the announced rebellion – then finally abandoned on Saturday evening – of the paramilitary group Wagner, led by Evguéni Prigojine, nicknamed “Putin’s cook”, because he held the position of catering chef for a time at the Kremlin. This ultra-violent paramilitary organization has recently had victories on the Ukrainian front. But Prigojine, very critical of the Minister of Defense, Sergei Chogou, launched his troops on the night of Friday to Saturday towards Moscow.
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“Cracks” in the Russian camp
Saturday morning, he claimed the capture of Rostov-on-the-Don and headed for the Russian capital before backtracking in the evening, a few hundred kilometers from the city, claiming to want to avoid a bloodbath. According to the Kremlin, he was to go to Belarus.
This flash episode hinted at major cracks on the side of the Russian camp. “What happened over the weekend shows that the war against Ukraine is cracking Russian power and affecting its political system”, commented the head of diplomacy of the European Union, Joseph Borrell.
To the point that the market is speculating on the possibility of an acceleration of the end of the war in Ukraine. “There is an anticipation of the weakening of the conflict or even speculation about the end, which weighs on market sentiment for defense stocks even though the fundamentals have not changed”, estimates a Parisian analyst. .
Time to be selective in the sector
Recall that the outbreak of the war in Ukraine acted as a big wake-up call on the market for defense securities, underlining the importance of its groups in maintaining security in the world. Before this conflict, defense stocks were trading at depressed multiples due to the lack of appetite for this sector from ESG investors (social environment, governance, extra-financial criteria). The conflict in Ukraine led the market to anticipate additional orders and military spending that actually took place, particularly in Germany and the Netherlands.
For these reasons, Dassault Aviation and Thales signed two of the three largest increases in the SBF 120 on the stock market last year (1st with +66.5% and third with +59.5% respectively).
With this surge, analysts are now calling for good judgment. In a recent note, mid-June, Morgan Stanley estimated that with valuations close to their all-time highs, the time had come to be “selective”.
“While the growth prospects for defense budgets and the sector are indisputable, the sector has already grown by 80% in the last 18 months and there is no visibility on the potential outcome of Ukraine”, exposed the American bank.
This has led Morgan Stanley to favor equities with diversified geographical exposure, strong growth potential even outside Ukraine, potential good surprises on earnings expectations, as well as an attractive shareholder return policy. She had thus retained two titles to “overweight” – the equivalent of purchase at home – or BAE Systems, her favorite value, and Thales.
Julien Marion – ©2023 BFM Bourse
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