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European defence stocks fell heavily on Monday as some investors bet that political instability in Russia could hamper the Kremlin’s war effort and shorten the conflict in Ukraine.
Saturday’s abortive insurrection by warlord Yevgeny Prigozhin prompted profit-taking by some from a sector that has soared since Russia’s invasion of Ukraine in February 2022, analysts and industry executives said.
Italian defence group Leonardo, Sweden’s Saab and Germany’s Rheinmetall all initially fell more than 5 per cent before recovering slightly to trade 3.5 per cent, 4.2 per cent and 3.1 per cent lower respectively by early afternoon. French groups Dassault Aviation and Thales fell 2.3 per cent and 1.6 per cent respectively.
Shares in BAE Systems, Europe’s largest defence company, fell 3 per cent in morning trading before recovering to 921p, down 1.8 per cent.
The moves stood out in an otherwise muted market reaction after Prigozhin’s Wagner mercenary group on Saturday launched a shortlived rebellion against defence minister Sergei Shoigu and the commander of Russia’s invasion force Valery Gerasimov, who the militia leader blames for Russia’s botched invasion of Ukraine.
After easily taking the southern city of Rostov-on-Don, Wagner forces headed north for Moscow but turned around on Saturday evening after Prigozhin agreed to leave Russia for Belarus, and after President Vladimir Putin had sworn to punish his former caterer for treason.
Defence analysts suggested there could be an element of profit-taking behind Monday’s falls in the share prices, which they argued were unlikely to persist beyond the immediate knee-jerk reaction. Shares in European defence companies have performed strongly since the conflict first began as investors have bet on government pledges to increase military spending feeding through to industry.
“Even if an armistice is reached in Ukraine in 2024-25, Russia could still be viewed as a military threat and Ukraine will have to rebuild its military with help from Europe and the US,” Byron Callan, of research group Capital Alpha Partners, said in a note on Monday, adding that he was “a bit surprised” by the price declines in European stocks.
“Just as we do not see events of the last couple of days changing US defence spending, we do not believe they change current vectors for European spending,” he said.
Although the weapons and equipment being sent to Ukrainian forces have come from national stockpiles, companies have benefited from new orders since the war began.
Sweden’s Saab makes the NLAW anti-tank missiles that Britain has been sending to Ukraine in the thousands. In December, Saab secured a SKr2.9bn ($271mn) order from the UK.
In Germany, Rheinmetall reported record earnings in March and raised its forecast for next year. The company has seen strong demand for the Leopard 2 tank as well as for its ammunition. Monday’s share price move was the result of “a hope of peace in Ukraine” following the weekend’s events in Russia, said a person close to Rheinmetall. “[But] the things happening last weekend will not bring us an early end of the war,” the person added, highlighting the risks that would arise with further political instability in Russia.
Defence industry executives on Monday said that even if there was a peaceful resolution in Ukraine, the conflict had permanently changed western governments’ attitudes towards the sector and the importance of national defence industrial bases.
“Western countries will increase defence spending for years to come. We have orders coming in for a very long time,” said one executive at a European contractor.
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