Defence boom will continue long after Ukraine war, says Panmure
An end to hostilties in Ukraine would only be a short-term setback for the share price of European defence manufacturers, according to analysts.
The International Institute for Strategic Studies (ISS) said last week that in the case of a mid-2025 ceasefire in Ukraine, Russia could rearm and attack a Baltic state as soon as 2027.
The Russian military-industrial complex is a foundational pillar of its economy, with its decline potentially leading to a deep recession that could threaten Vladimir Putin’s rule. Around 6.7 per cent of Russia’s GDP was put into the Ukrainian invasion last year.
A halt to hostilities in 2025 would “not spell the end of the European defence supercycle,” analysts at Panmure Liberum wrote in a note on Monday.
European nations are in the midst of a massive rearmement programme as President Donald Trump seeks to reduce the continent’s reliance on the US military.
Shares in BAE Systems, Rolls-Royce and Babcock International have risen around 52 per cent, 37 per cent and 68 per cent respectively this year to date.
The ISS said Europe would need to spend between $226bn and $344bn to make up for the loss of American defence capabilities.
“Although an end to the war in Ukraine could lead to short-term setbacks in the share prices of these companies, especially given their stretched valuations, we believe any such setback would be short-lived and present a buying opportunity,” Panmure said.
“In our view, the European defence industry is in the middle of a supercycle with growth visibility for the next five years.”
EU-UK summit
The comments come after reports this morning of a €150bn loan-for-arms scheme for EU member countries.
The framework opened participation to non-EU contractors, with the likes of BAE and Rolls-Royce expected to gain access to the funding through a new bilaterial UK-EU security pact finalized at today’s summit.
While this may not immediately provide access for UK defence contractors to Europe’s substantial “Readiness 2030” funding pool, it is likely they will be roped in in the coming months, according to Panmure.
“This will boost the revenue outlook for UK defence contractors, in particular the smaller ones Qinetiq and Chemring, which have a larger share of their revenues coming from Europe already.”
The main problem for the wider European defence industry has been a lack of production facilities and capacity constraints.
This has left the door open for the UK to benefit as the EU looks to tap into additional production capacity beyond its borders, Panmure noted.