Markets can be jumpy at the best of times, but defence shares have a special talent for overreacting to the faintest whiff of geopolitics. This week provided a prime example.
A report that the US had drafted a new peace plan for the war in Ukraine sent European defence stocks down roughly 4.5% in a single session.
For the UK names at the heart of the sector, BAE Systems PLC (LSE:BA.), Rolls-Royce Holdings PLC (LSE:RR.), Melrose Industries PLC (LSE:MRO, OTC:MLSPF), QinetiQ Group PLC (LSE:QQ.), Babcock International PLC (LSE:BAB) and Senior PLC (LSE:SNR), the move looks more like a rush for the exits than a considered assessment of risk.
JPMorgan thinks so too. The bank argues the sell-off was a significant overshoot, driven by headlines rather than substance. By the time European markets closed, the plan everyone was fretting about had begun to leak.
The details, reported by The Financial Times, read more like a non-starter than a roadmap. Ukraine would be asked to surrender territory it still controls, halve the size of its army, give up classes of weaponry and accept sweeping limits on Western support.
It would also be barred from hosting foreign troops. There is nothing in that list that Kyiv has ever accepted before, and no obvious reason why it would now.
If anything, JPMorgan argues, the unlikely prospect of such a plan being imposed would harden attitudes in Europe. A settlement seen as a victory for Moscow would push European governments to accelerate the military build-up already underway, not wind it down.
That leaves the demand backdrop for the UK’s defence and aerospace contractors broadly unchanged.
For BAE Systems, which has become a proxy for Europe’s rearmament programme, the fundamentals were not altered by a single headline. Rolls-Royce’s defence business, now one of the group’s most stable profit centres, is linked to long-term engine and support contracts that are not dictated by day-to-day developments in Ukraine.
Melrose, which owns aerospace supplier GKN, sits on multi-year order books tied to both civil and military programmes.
Qinetiq’s test and evaluation contracts are funded through UK sovereign budgets. Babcock remains a core supplier to the Royal Navy and the UK’s nuclear enterprise. Senior, with exposure to both defence and civil aerospace, is tied to structural demand rather than geopolitics.
JPMorgan’s base case is grim but realistic: the war is likely to continue deep into 2026, perhaps beyond. That view is informed by defence analysts, think tanks and policymakers who see no meeting point between Russia’s maximalist aims and Ukraine’s fight for sovereignty.
A war with no immediate prospect of settlement leaves Europe with little choice but to keep raising defence spending, whatever Washington’s diplomatic overtures.
Investors were spooked by the headline. The research makes clear that the substance never justified the reaction. Viewed from a UK perspective, the case for the sector (and for its largest listed names) looks largely intact.