BAE and Rolls-Royce in the line of fire as defense shares plummet in a £12 billion rout
European defense and aerospace shares suffered a £12 billion sell-off yesterday on concerns their record-breaking run could be reaching its peak.
Britain’s BAE Systems and Rolls-Royce were in the red as analysts questioned whether sharp increases in valuations could continue.
A gauge of European defense stocks, which includes British listed companies, fell 3.9 percent – the biggest drop in more than a year.
The index has nearly doubled in value in recent years after Russia’s invasion of Ukraine boosted prospects for higher military spending on the continent.
And the prospect that Donald Trump will weaken America’s commitment to protect Europe has further concentrated minds in European capitals.
Rout: A gauge for European defense stocks, including UK listed companies, fell 3.9% – the biggest drop in more than a year
It means NATO members are under increasing pressure to meet long-neglected commitments to spend 2 percent of their GDP on defense.
That has boosted defense stocks across the continent and in the city. They now trade at a 45 percent premium to the broader European stock market, according to analysts at Goldman Sachs.
And it has helped the companies, which for years have complained that they are undervalued compared to Wall Street’s big gun makers, make up some of that difference. Goldman’s analysts said the sector was in a “super cycle.”
A separate report from Bernstein said that after trading at a more than 50 percent discount to U.S. peers, the sector “did something that would have been unthinkable 27 months ago: They essentially closed the valuation gap.” .
Yesterday’s fallers included Germany’s Rheinmetall, which suffered a 6.9 percent fall, wiping £1.5 billion off its value.
France’s Thales lost 4.9 percent, also reducing its market capitalization by around £1.5 billion.
In London, BAE Systems – maker of warships, fighter jets, submarines and grenades – fell 4.5 percent.
That took £1.8 billion off the valuation. But it is still worth twice as much as it was before the war in Ukraine.
Rolls-Royce fell 3.9 percent, or £1.4 billion, although that has hardly dented the staggering rise under chief executive Tufan Erginbilgic, who has seen a fourfold increase in the share price since taking over early last year.
Other decliners on the British stock market were Babcock, down 2.5 percent, Chemring, down 5 percent, and Senior, down 2 percent.
However, a number of analysts were still largely positive about the sector.
Nick Cunningham, managing partner at equity research firm Agency Partners, said: “The reality is that European rearmament is only just getting started, and these stocks still have a long way to go in terms of growth.”