Defence stocks: coup attempt does not change the calculus

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Happy Christmas, war is over? Hardly. It is only midsummer and a complex cascade of events would need to follow the failed Russian coup to bring peace to Ukraine. A sell-off in European armaments stocks is premature.

Shares in Saab of Sweden and Germany’s Rheinmetall tumbled as much as 6 per cent on Monday morning. Investors are right that Yevgeny Prigozhin’s shortlived insurrection weakened Russian president Vladimir Putin. But prospects for European defence companies have not worsened correspondingly.

Europe’s defence spending ticked up markedly after Russia’s 2014 Crimean incursion. Last year, with the stimulus of the Ukraine war, the outlay rose 14 per cent to $480bn, according to the Stockholm International Peace Research Institute. Compare that with global growth of 4 per cent.

Europe is playing catch-up. Until recently, its expenditure, adjusted for inflation, was at the level of the early 1990s, say Bernstein analysts. After Crimea, EU nations agreed to raise defence spending to at least 2 per cent of gross domestic product. They have achieved just over half that. Reaching the target would require another 0.7 per cent of GDP on average, say researchers at Bruegel, worth some €110bn.

Weapons companies can expect higher orders to continue. Consider Sweden’s Saab, which has high defence exposure. Last year its order backlog more than doubled to the equivalent of €1.5bn. Since the end of 2021, its market value has jumped 2.5 times.

Rheinmetall would feel a profit hit more quickly in the event of peace in Ukraine. Armaments and munitions generated 40 per cent of operating profits last year. The figure has almost doubled since 2019. The unit produced the lion’s share of profit growth over the period.

Europe has suffered a painful reminder that conventional warfare is possible on its soil, no matter how the aftermath of the failed coup plays out. Nations are equipping appropriately. Swords will remain in greater demand than ploughshares.