Defence stocks have been among the standout performers in European markets since Russia’s invasion of Ukraine. But with whispers of a ceasefire gaining traction, some investors are asking whether the rally has run its course.
Panmure Liberum thinks not. In a recent note, the broker argues that the drivers behind the “European defence supercycle” are structural, not merely cyclical. Since 2022, defence shares have outpaced the broader European market by more than 10% a year.
That outperformance, Panmure believes, could continue even in the event of a political settlement in Ukraine.
Threat remains
The reason is simple. A temporary halt to hostilities would not erase the perceived threat from Russia.
The International Institute for Strategic Studies recently warned that Moscow could rearm and be in a position to threaten NATO territory, particularly in the Baltics, by 2027. That timeline has injected urgency into defence planning across the continent.
The European Commission’s revamped Readiness 2030 programme, designed to accelerate rearmament, could unleash up to €800 billion in spending.
Panmure sees €600 billion as a more realistic figure, allowing for fiscal caution among southern member states. Even so, that represents a substantial uplift from pre-war levels and points to a prolonged upswing in demand for defence equipment, systems and services.
The real constraint is not political will, but production capacity. Europe lacks the industrial scale to meet its own defence needs quickly.
Aggressive expansion
Manufacturers such as Rheinmetall and Hensoldt are expanding aggressively, with some recruiting from the auto sector to boost headcount. But ramping up production takes time. In the meantime, the bottleneck is supply, not demand.
That creates opportunities for UK defence companies, which Panmure believes are increasingly likely to benefit from an expanded interpretation of the EU’s “Europe-first” procurement policy.
As the UK and EU move closer to a formal security agreement, British firms are expected to be treated as trusted partners, particularly in areas where European production remains limited.
Brits will benefit too
BAE Systems PLC (LSE:BA.), which already has deep ties with European governments and NATO, stands to benefit from increased collaboration and demand.
So too do mid-cap players like QinetiQ Group PLC (LSE:QQ.) and Chemring Group (LSE:CHG), which generate a growing share of their revenues from the continent.
Still, valuations are no longer cheap. The sector trades at a 55% premium to the wider market, a stark reversal from its 28% discount in 2021.
Panmure concedes that any ceasefire could trigger a short-term pullback. But it would see that as a buying opportunity, not the end of the cycle.
With strategic rivalry enduring, industrial capacity playing catch-up and European governments eager to reduce dependence on the United States, defence is looking less like a one-off trade and more like a long-term growth story.