(News Bulletin 247) – The entire sector is struggling this Friday, October 17, while the meeting between Vladimir Putin and Donald Trump reignited speculation about a hypothetical ceasefire in Ukraine.

The refrain is well known. Shares in the European defense sector have evolved, in recent months, much more in line with political and geopolitical declarations and developments than with publication of results.

Last August, the entire compartment spent its time describing sinusoids on the stock market, depending on the hopes and damp squibs regarding a potential ceasefire in Ukraine. Ultimately, the meetings between American President Donald Trump and his Russian counterpart Vladimir Putin never led to this.

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However, a revival of speculation is observed on the market this Friday. In Paris, Thales fell by 2.3% this Friday in the middle of the afternoon after losing up to 4%, Dassault Aviation lost 0.9% after seeing a decline of 2.6% at the start of the session. Exosens, which manufactures night vision devices for armies, lost 6.8% while Exail Technologies lost 2.5%.

Outside France, in Frankfurt, Hensoldt, a military optronics group fell 6.6%, Renk, which produces gearboxes for tanks, dropped 5% and Rheinmetall, much more exposed to the Ukrainian conflict than the French groups, lost 5.5%.

In a note published in October, Oddo BHF wrote that Rheinmetall derived around 20% of its defense revenue from contracts with Ukraine.

In London, BAE Systems fell 3.2% while in Milan, Leonardo fell 4.2%.

Profit taking

These movements occur as Donald Trump and Vladimir Putin, to everyone’s surprise, resumed their discussions on Thursday evening and agreed to meet in Budapest “in the next two weeks”. This while Volodymyr Zelensky, the Ukrainian president, is due to meet Donald Trump this Friday to convince him to deliver Tomahawk missiles to the Ukrainian armed forces. Vladimir Putin has explained several times in recent days that if Ukraine were to have such a weapon, “a new stage of escalation” would be reached in the conflict.

The market sees in the resumption of dialogue between the Russian and American leaders the beginnings of a possible path leading to a hypothetical de-escalation.

“Although concerns about a possible ceasefire in the Russian-Ukrainian conflict have increased in recent days, our analysis remains unchanged: it is highly unlikely, in our opinion, that progress will be made towards a lasting reduction in tensions in Europe, and even a ceasefire would not compromise the announced reinvestment in defense,” says Jefferies, in a note.

“The announcement of the European Drone Defense Initiative and the fortification of the eastern borders, called ‘Eastern Flank Watch’ (…) corroborate our view. We would buy defense stocks in the event of a potential decline today, and in particular Rheinmetall, our first choice”, continues the bank.

“Given the strong rise in the sector this year, you are very happy to have reasons to take profits. Especially since market valuations are distorted and we are at levels which are not justified, despite the prospects,” explains a sector analyst.

Beyond the exchanges between Vladimir Putin and Donald Trump, this analyst believes that the sector may be weighed down by fears around access to rare earths in China, which raises fears of a risk of a bottleneck on supplies for certain materials.

He also cites discordant speeches between Friedrich Merz, the German chancellor (CDU, conservatives) and Boris Pistorius (SPD), the defense minister, on the subject of military service.

Remember that the sector has been on the rise since the start of the year. Thales has gained 78% since January while Rheinmetall has gained 170%.

Defense groups have been propelled by multiple announcements of increases in military budgets in Europe. Under pressure from the United States, which is now much less inclined to ensure the security of the Old Continent, Europe has decided to rearm. Germany, for example, has announced hundreds of billions of euros of investment in defense.

In June, NATO member countries committed to investing 5% per year of their GDP in defense spending by 2035, compared to a previous target of 2%.

“We estimate that this target of 5% by 2035 could represent an annual increase of around $2,000 billion in NATO defense spending, or an average annual growth rate of around 8% between 2024 and 2035,” calculated Royal Bank of Canada.