European defense stocks fall after failed uprising in Russia

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European defense stocks fell sharply on Monday as some investors bet that political instability in Russia could hamper the Kremlin’s war effort and shorten the conflict in Ukraine.

Analysts and industry executives said Saturday’s failed coup by warlord Yevgeny Prigozhin prompted some to profit from the sector, which has soared since Russia’s invasion of Ukraine in February 2022.

Italian defense group Leonardo, Sweden’s Saab and Germany’s Rheinmetall all fell more than 5 percent early, but recovered slightly by the afternoon, down 3.5 percent, 4.2 percent and 3.1 percent, respectively. French groups Dassault Aviation and Thales declined 2.3 percent and 1.6 percent, respectively.

Shares in Europe’s biggest defense company BAE Systems fell 3 per cent in morning trade and then fell 1.8 per cent to 921p.

Prigozhin’s Wagner mercenary group launched a short-lived mutiny on Saturday against Defense Minister Sergei Shoigu and Russia’s assault force commander Valery Gerasimov after the militia leader blamed Russia’s failed invasion of Ukraine, which has since The moves unfolded in an otherwise muted market reaction.

After easily capturing the southern city of Rostov-on-Don, Wagner’s forces advanced north towards Moscow, but on Saturday evening Prigozhin agreed to leave Russia for Belarus and his former caterer was declared treason by President Vladimir Putin. They returned after taking an oath to punish them.

Defense analysts suggested that there could be an element of profit-taking behind Monday’s decline in share prices, which they argue is unlikely to continue after the immediate quick reaction. Shares in European defense companies have performed strongly since the conflict began as investors bet on government promises to increase military spending for industry.

Byron Callen of research group Capital Alpha Partners said, “Even if there is a ceasefire in Ukraine in 2024-25, Russia could still be seen as a military threat and Ukraine could build up its military with the help of Europe and the US.” have to be rebuilt.” In a note on Monday, he said he was “a little surprised” by the decline in prices in European stocks.

“Just as we do not see any change in US defense spending from the events of the past few days, we also do not believe that they will change the current drivers for European spending,” he added.

Although the weapons and equipment being shipped to the Ukrainian military come from national stockpiles, companies have benefited from new orders since the start of the war.

Sweden’s Saab makes NLAW anti-tank missiles, which Britain is sending thousands to Ukraine. In December, Saab secured SKr2.9bn ($271mn) order from uk,

In Germany, Rheinmetall reported record earnings in March and raised its forecast for next year. The company has seen strong demand for the Leopard 2 tank as well as its ammunition. Monday’s share price change was the result of “hopes for peace in Ukraine” after the weekend’s events in Russia, said a person close to Rheinmetall. “(But) the things that happened last weekend will not bring us a quick end to the war,” the person said, highlighting the risks that arise with further political instability in Russia.

Defense industry executives said Monday that even though a peaceful resolution has been reached in Ukraine, the conflict has permanently changed the attitude of Western governments toward the region and the importance of national defense industrial bases.

“Western countries will increase defense spending in the coming years. We have had orders coming in for a very long time,” said an executive of a European contractor.