By Anna Pruchnicka
(Reuters) -European defence shares fell on Friday to their lowest since late August, as reports about a U.S.-backed deal to end the war in Ukraine hit one of the region’s best-performing sectors this year.
Washington has presented Kyiv with a 28-point plan that would endorse many of Russia’s main demands.
Ukrainian President Volodymyr Zelenskiy said he was ready for “honest” work on the plan, but that he would not betray Ukrainian interests.
An index of aerospace and defence companies was down 3.1% at 1605 GMT after falling as much as 3.9% earlier. It underperformed the Europe-wide STOXX 600 index, which was down 0.4%.
While off a recent peak in October, the index is still up more than 200% since Russia’s full-scale invasion of Ukraine in February 2022.
“Even if Europe feels blindsided, (U.S. President Donald) Trump and (Russian President Vladimir) Putin will not care. It could be that the peace plan will actually succeed,” said a Frankfurt-based trader.
Gerry Fowler, head of European equity strategy at UBS, said European defence stocks were “the most expensive and crowded part of the market”, which could exacerbate volatility.
PROSPECT OF HIGHER DEFENCE SPENDING
Shares in Germany’s Renk, sensor systems maker Hensoldt, ammunition producer Rheinmetall and warship builder TKMS were down between 6% and 8%.
A spokesperson for Hensoldt questioned the share price move.
“I consider this to be a dangerous misinterpretation because even if the fighting in Ukraine comes to an end, it does not mean that Europe is safe and no longer needs to invest in defence. If Russia’s war against Ukraine ends, it means that Russia will have time and resources to seek out other targets,” the spokesperson said.
A spokesperson for TKMS said that while it welcomed any peace efforts, strategic defence products were also needed in the absence of conflict.
Rheinmetall declined to comment.
Italy’s Leonardo, Sweden’s Saab and Spain’s Indra were down between 4% and 5%.
Defence stocks have helped to push the STOXX 600 index 10% higher this year, hitting successive record highs on the back of the prospect of surging government spending on security.
JPMorgan analysts wrote in a note earlier this week that they did not think the latest peace plan would be acceptable to Ukraine or its European allies, and viewed the recent selloff in defence companies as a “compelling entry point” into the sector.
“If the U.S. is able to impose this plan (which is unlikely, in our view) we think it would amount to a de facto victory for Russia, driving European defence spending even higher than planned and at a much faster pace,” they wrote.
(Reporting by Anna Pruchnicka in Gdansk. Addditional reporting by Daniela Pegna in Frankfurt, Lucy Raitano in London, Maria Rugamer in Gdansk and Matthias Inveradi and Tom Kaeckenhoff in Duesseldorf. Editing by Dhara Ranasinghe, Alex Richardson and Mark Potter)
