(Bloomberg) -- European defense stocks rebounded from a selloff after Morgan Stanley said the industry should benefit from countries restocking equipment they’ve donated to Ukraine and seeking to reduce their dependence on the US.
Analysts Ross Law and Marie-Ange Riggio reiterated their positive view on the industry in a note, citing shares of Rheinmetall AG and BAE Systems Plc as attractive.
Rheinmetall, a top pick at Morgan Stanley, as well as Kongsberg Gruppen ASA, Leonardo Spa and Dassault Aviation SA rose in early trading Wednesday. An index of defense stocks slumped to a six-month low Tuesday after Bloomberg News reported that some of Ukraine’s allies were starting to look into how a cease-fire could work.
The selloff on the report “reflects the impact of market sentiment and positioning following strong performance in the sector since early 2022,” the analysts wrote. “However, we believe the underlying drivers of defense spending remain intact.”
Stocks covered by the firm saw a €6.4 billion drop in market value Tuesday, they wrote. A Goldman Sachs Group Inc. basket of European defense stocks has almost tripled since the war in Ukraine began in February 2022, compared with a 25% return fo the Stoxx Europe 600 Index.
Besides restocking materiel donated to Ukraine and cutting their dependence on the US, European governments need to spend more than €2 trillion to make up for 30 years of underspending on defense, the Morgan Stanley analysts said.
In a separate note, Morgan Stanley said comments by executives at industry conferences in recent weeks confirmed their positive view on both sides of the Atlantic. Management teams say that structural spending in Europe remains intact and that there’s bipartisan support for defense in the US, the analysts wrote.
The Goldman basket of European defense stocks rose 1% at 11:36 a.m. in Frankfurt. It’s down 8.7% in September and 11% from its record high at the beginning of June.
--With assistance from Lisa Pham and Joe Easton.
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