(News Bulletin 247) – Companies in the sector fell sharply on Tuesday following a Bloomberg article mentioning discussions between Ukraine’s allies on a potential ceasefire.

Defense remains a sector whose prices, a bit like oil, are often influenced by geopolitics.

This Tuesday, the entire sector is suffering. On the Paris Stock Exchange, around 4 p.m., Thales is down 5%, Dassault Aviation is down 3.7%. In Frankfurt, Rheinmetall, a company that manufactures tanks, munitions and other military equipment, is down 6% while Hensoldt, which provides optronic solutions, sensors and military electronics, is down 5%. In London, BAE Systems is down 4.4% while in Milan Leonardo is down 3.8%.

The moves are linked to a Bloomberg report that Ukraine’s allies were considering what form a ceasefire might take in the conflict that has pitted kyiv against Moscow since February 2022.

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A market feeling

According to sources close to the agency, officials are “thinking more seriously about how a negotiated end to the conflict and an exit could take shape.”

Bloomberg adds, however, that the allies insist that the decision would ultimately be up to Ukraine and Ukraine alone. And that no one would pressure Ukrainian President Volodymyr Zelensky to start talks.

The fact remains that this information finds, as is often the case, an echo on the stock market. “Of course, with the slightest information on a ceasefire, the sector consolidates, this is normal, it is purely market sentiment. The sector is sensitive to the slightest prospect of a potential end to the conflict. And on the market, everything that has risen sharply, such as defense, is bound to fall again at one time or another,” judges an analyst.

“In concrete terms, a ceasefire would not have an impact on the results of a large majority of defense companies. And in the medium to long term, I am not worried about the sector, because a recapitalization of military resources in Europe is taking place,” he added.

A sensitive sector

Let us recall that the outbreak of war in Ukraine in February 2022 brought the defense sector back onto investors’ radar. The market had previously neglected these stocks, due to their limited appeal in terms of ESG (environment, social governance, extra-financial criteria).

The conflict in Ukraine has changed the situation, with many European states, such as Germany, Finland and Poland, choosing to reinvest in military spending. In addition, funds that previously excluded the defence sector from their investment choices have returned to the sector.

This has resulted in a sharp rise in the stock market for these shares. The most glaring case remains Rheinmetal, whose share price has increased by around five times since February 24, 2022, the date of the outbreak of war in Ukraine.

The fact remains that with these increases, the slightest information is likely to cause their prices to sway. In August, the sector had wavered a little after press reports that Germany could slow its federal spending as part of its support for Ukraine.

In April, Goldman Sachs bank judged that the sector’s shares had certainly reached their full potential.