European defence stocks cool as investors reassess war winners

Investors have cooled on European defence stocks as profit taking and stretched valuations collide with growing uncertainty over the future of warfare, with the Iran conflict again highlighting the effectiveness of low-cost drones, Report informs via Reuters.

MSCI's ​Europe Aerospace and Defence Index dropped 9.2% in March, its biggest monthly fall in five years, as a previously stellar trade began to unwind.

Defence stocks typically ‌rally at the outbreak of war - such as after Russia's full-scale invasion of Ukraine in 2022 - or when US President Donald Trump pressures NATO allies to raise military spending.

But that has not been the case since the Iran conflict erupted on February 28, despite Trump repeatedly berating NATO for not assisting with US military action.

"There has been quite a lot of de-grossing (trimming positions) as financial institutions and retail investors have looked to ​reduce exposure amid increased uncertainty," said Martin Frandsen, portfolio manager at Principal Asset Management.

Shares in Czech arms maker CSG have dropped almost a third since the conflict ​began, while Germany's Rheinmetall and Renk are down about 10% and Sweden's Saab is about 12% lower.

European defence stocks have been among ⁠the market's strongest performers since Russia's full-scale invasion of Ukraine in February 2022, rising more than 450%, compared with a roughly 40% gain for the MSCI Europe index.

The rally was fuelled ​by pledges from European governments to boost defence spending and Germany loosening fiscal rules last year to turbo-charge its rearmament drive.