A victory for Donald Trump in the presidential election is generally perceived as favorable for European defense stocks, particularly due to his indications of reducing U.S. military assistance in the area and pressuring NATO allies to allocate 2% or more of their GDP towards defense expenditures. However, if he were to win and act on his commitments to swiftly conclude the conflict in Ukraine, the defense sector could experience increased volatility.

JPMorgan has recommended that clients take precautions against potential short-term downturns as the November 5 election approaches.

Significance of this situation

The significance of this situation cannot be overstated. Analysts predict that a ceasefire in Ukraine may lead to substantial drops in defense stock prices. However, investors are poised to capitalize on this high-growth sector by acquiring shares at reduced prices. Since Russia’s invasion of Ukraine in 2022, stocks of Germany’s Rheinmetall, Sweden’s Saab, and Italy’s Leonardo have surged by 230-360%. Similarly, France’s Thales and the UK’s BAE Systems have experienced increases of 70% and 100%, respectively, during the same timeframe.

Analysis of the Situation

Citi estimates suggest that the prospect of Washington facilitating peace in Ukraine may lead to an initial decline of as much as 20% in European defense stock prices. The U.S. bank interprets a potential victory for Kamala Harris as a means of maintaining the current situation. Additionally, there is the possibility of increased capital inflows, which could bolster any future market rally. According to Morgan Stanley’s investor positioning data, 72% of global funds currently lack exposure to the European defense sector.

Key Quote

Rob Hansen, a portfolio manager at Vontobel and an investor in Rheinmetall, stated in New York, “The announcement of a ceasefire in Ukraine will likely trigger a significant market pullback. However, that day will present an excellent opportunity to invest in these companies. The defense sector is experiencing sustained structural growth.”