[SINGAPORE] On Sunday (Jun 1), more than 100 Ukrainian drones, reportedly launched from deep in Russian territory, damaged or destroyed US$7 billion worth of Russian aircraft.
That same day, Ukraine was struck by over 470 Russian drones and seven missiles, the heaviest barrage since the full-scale invasion began in February 2022.
Less than a day later, negotiators from both sides met in Istanbul for peace talks – the first real attempt in months to halt a war that has become Europe’s largest conflict since World War II.
But with tensions on the boil, few are holding their breath for a breakthrough. If anything, following Sunday’s salvos, the odds favour escalation.
Among the various groups, one of them – the defence contractors – will not be complaining.
Yes, it feels crass to talk about market gains while a war rages. But in the year to date, Western European defence stocks have delivered blowout returns.
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
Germany’s Rheinmetall – a leading manufacturer of armoured vehicles and large-calibre ammunition – is up more than 200 per cent in the year to date as at Wednesday. Italy’s Leonardo has surged more than 103 per cent, and Sweden’s Saab has similarly climbed over 109 per cent. In contrast, the broader Stoxx 600 is up a comparatively miserly 7 per cent.
The surge is hardly surprising. With Russian President Vladimir Putin’s forces looming from afar, European governments are increasingly taking defence into their own hands.
Meanwhile, US President Donald Trump’s erratic tariff threats and open disdain for the North Atlantic Treaty Organization (Nato) have also made it riskier for Europe to rely too heavily on American support – or American-made arms.
These geopolitical shifts have already prompted concrete actions. In March, German lawmakers voted to exempt defence spending from the country’s strict fiscal rules.
That same month, French President Emmanuel Macron called for European military expenditure to rise to 3 to 3.5 per cent of gross domestic product – well above the Nato target of 2 per cent.
Still room to run?
The question now is whether investors have missed the party. Can defence stocks climb even higher from here? Probably.
European Nato members spent a third of their defence budgets on equipment last year, up from 15 per cent in 2014, according to a Feb 27 report by Goldman Sachs Research economists Niklas Garnadt and Filippo Taddei.
Crucially, most of that spend stays local.
Between 2005 and 2022, an average of 90 per cent of France’s defence purchases came from domestic firms, the economists wrote. The figure is 80 per cent for Germany and 70 per cent for Italy.
That means national champions such as Dusseldorf-based Rheinmetall are well-placed to scoop up new orders – especially if the war grinds on or spreads beyond Ukraine.
Indeed, Rheinmetall expects revenue to grow by up to 30 per cent in the 2025 financial year, with operating margins exceeding 15 per cent.
The earnings guidance, published on Apr 28, does not yet factor in potential upside from recent geopolitical developments, the company noted – though it did not specify what those developments were.
But what about valuation?
There is one obvious red flag: price.
As at Wednesday, Rheinmetall was trading at a trailing price-earnings ratio of 93.89 times – far above its US peers such as Lockheed Martin (17.53), RTX (24.01) or Northrop Grumman (21.16), according to Bloomberg data.
Other national champions, such as the UK’s BAE Systems (30.14) and France’s Thales (54.59), were also trading at comparatively pricier valuations than their American peers.
Still, for investors betting on the unfortunate logic of endless conflict and nationalist spending, high valuations may be a feature, not a bug.
As long as Europe re-arms and the US retreats into itself, the money must go somewhere – and that “somewhere” is increasingly Europe’s own backyard.
For those of us who have yet to board this metaphorical tank, it may not be too late.
