(BFM Stock Exchange) – The titles of the sector are under pressure this Monday, May 12, while the Ukrainian president, Volodymyr Zelensky, again called Russia to a truce. The sector also suffers from a negative rotation which are carried out at the expense of defensive actions.

It is a small music that begins to turn into chorus on the market: when the appetite for the risk returns, European actions in the defense sector are suffering.

If necessary this Monday, May 12. The large global clues evolve sharply, the CAC 40 taking, for example, 1.5% at the end of the morning. Investors welcome the 90-day break announced by China and the United States on customs duties that they have inflicted each other.

European defense actions do not participate in the party. Dassault Aviation and Thales accuse two of the strongest folds of the SBF 120, losing 4.9% and 2.8% at the end of the morning. Exosers, specialized in military optronics, fell by 4.2%. In Frankfurt, Rheinmetall, which notably provides armored vehicles to the German army, sold 5% while in London Bae Systems abandoned 2.6%. In Milan, Leonardo fell 4.9%.

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Questions about the conflict in Ukraine

Several elements play against these titles. In particular the latest information on the conflict in Ukraine which appeared this weekend. The Ukrainian president, Volodymyr Zelensky, supported by his European allies, claimed a 30 -day truce, failing which Russia would be struck by new sanctions.

Without responding directly to the ultimatum of the kyiv allies, the Russian president, Vladimir Putin, said he was ready “to negotiations without any prerequisite” and proposed to start them on Thursday in Istanbul, AFP reported.

If it is obviously difficult to anticipate the outcome of the meeting between Moscow and kyiv, this information goes rather in the direction of a potential ceasefire in Ukraine, as this hypothesis remains fragile.

“Annual expenses for the conflict in Ukraine, with many shells and radars, are around 20 billion euros for Europe. We can therefore understand that information on a potential ceasefire penalizes them”, judges an analyst.

According to the Kiel Institute for the World Economy, Europe has allocated 138 billion euros in assistance to Ukraine since the start of the conflict, at the end of February 2022, a figure which increases to 114.6 billion euros for the United States.

Refuge values ​​undermined

Another phenomenon is likely to weigh the defense actions: a market rotation. Defense values ​​remain titles dependent on public procurement. However, since the beginning of the year, European leaders have multiplied the announcements to rearm Europe, Germany in mind.

In view of the sometimes provocative declarations of the United States on the United States’s commitment to NATO (North Atlantic Treaty Organization), Europeans have understood that they should count more on themselves and less on the United States to ensure their security. Currently, the United States represents approximately 70% of NATO spending, according to the independent AlphaValue design office.

A brutal alarm clock was thus made. “Europe has clearly changed paradigm in defense expenditure. This change has been triggered by the risk that the United States will withdraw its support from Ukraine in the current war and by the feeling that the protection they grant to Europe is threatened, in particular in the context of a potential conflict with Russia,” said Jefferies in March.

The bank then noted that military spending in Europe could represent 3% of the gross domestic product (GDP) or even 3.5% in 2030 against 2%, approximately, in 2024. This would imply growth of 7% per year in the first case and 10% in the second, calculated Jefferies.

Due to these radiant prospects, many of the defense titles have jumped on the stock market. Rheinmetall, for example, has been 160% since the start of the year, and Thales 72.3%.

Above all, “while the other sectors have suffered questions around customs duties, the actions of the defense sector have served as a value refuge for investors in recent weeks, because more immune to customs surcharges”, comments the anonymous analyst previously quoted.

However, with the renewed appetite for the risk that the market knows on Monday, the defensive values ​​are undermined. In addition to the defense actions, the Danone and Orange titles, which very well resisted customs turbulence, suffer, the first backing of 2.6% and the second of 2.4%.

The valuations in question

In addition, the subject of the valuation of defense actions in Europe remains an open question. This Monday, Képler Cheuvreux published a positive note on Rheinmetall but was more reserved on two other values ​​in the sector, the broker having previously shown skepticism on the surge of the sector.

“The centuries -old trend (structural, note) that the defense attracts a wider investor base is far from over, in our opinion, and should continue to stimulate valuations,” pointed to Jefferies in a note published at the beginning of the month.

Historically the defense sector has suffered from a low attraction to European institutional investors due to risk perceptions ESG (environment, social, governance). Or to simplify: investors were rechoking investing in companies that produce weapons or military devices.

But the situation has changed in recent months. Speaking example: the European Management Giant Amundi announced last week an index (ETF) fund focused on European defense.

The Euronext stock operator Euronext delivered a series of measures last week to strengthen the financing of the sector, by promoting for example the IPOs or the issue of bonds. Euronext has also revised its criteria to build its ESG indices. This should make it possible to include defense groups as long as they do not make weapons prohibited by international treaties.

“The funding of the defense sector is compatible with the ESG rules”, wrote, in a column published in Agefi, Nathalie Tubiana; Director of finance and sustainable policy of the Caisse des Dépôts group in late April.