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US and European defence stocks experienced significant declines on Monday, as investors speculated that political instability in Russia could hinder the Kremlin’s war efforts and result in a shorter conflict in Ukraine.
Leading US defence contractors, including Lockheed Martin, Northrop Grumman, Raytheon Technologies, and General Dynamics, all saw their stock prices drop by 1 to 2 percent.
In Europe, Leonardo, Saab, and Rheinmetall initially experienced drops of over 5 percent before recovering slightly at the end of the day with losses of 4.6 percent, 4.5 percent, and 4.2 percent, respectively. Dassault Aviation and Thales, two French groups, also registered declines of 3.6 percent and 2.6 percent.
BAE Systems, the largest defence company in Europe, initially fell by 3 percent but later recovered to a 2.1 percent decline.
The market reaction was relatively muted following the insurrection by the Wagner mercenary group, which was quickly suppressed. However, some analysts believe that profit-taking may have contributed to the initial stock price declines and that these declines are unlikely to persist in the long term.
European defence companies have performed well since the conflict began, as investors have anticipated increased military spending by governments.
According to Byron Callan of research group Capital Alpha Partners, even if an armistice is reached in Ukraine, Russia could still be viewed as a military threat, leading Ukraine to rebuild its military with assistance from Europe and the US. Callan expressed surprise at the price declines in European stocks, stating that events of the past few days do not alter the trajectory of European defence spending.
While the weapons and equipment sent to Ukrainian forces come from national stockpiles, defence companies have still benefited from new orders. For instance, Saab has received orders for the NLAW anti-tank missiles, which the UK has been supplying to Ukraine in large quantities.
Rheinmetall, the German company, reported record earnings in March and raised its forecast for next year, driven by strong demand for its Leopard 2 tank and ammunition. The recent stock price decline is related to hopes of peace in Ukraine following the weekend’s events in Russia, but industry insiders caution that this will not lead to an immediate end to the war.
Lockheed, the leading US defence stock, experienced the largest decline on Monday, down 2.1 percent. However, this comes after an 18 percent increase since the start of the war, as the US has committed significant military aid to Ukraine.
Analysts and investors anticipate long-term growth in the defence sector as western nations increase their military spending in response to the war. Northrop Grumman’s stock, for example, has increased by 10 percent since the war began.
Defence industry executives believe that even if a peaceful resolution is reached in Ukraine, the conflict has permanently altered western governments’ attitudes towards the sector and the importance of national defence industrial bases. As a result, they expect increased defence spending for years to come.
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