European Defence Faces Challenges

With the latest escalation of tensions in Ukraine and the re-election of Donald Trump, European defence stocks face an uncertain future.

Trump's Push for Defense Spending

The impending return of Donald Trump to the White House was initially perceived as bullish by European defence manufacturers. The 45th and future 47th US President is known for pushing European countries to increase their defence spending and emphasising to EU leaders their over-dependence on the US in matters of defence, particularly given Europe's desire to continue the war in Ukraine, while Trump has vowed to reach a ceasefire agreement at least in the near term.

Following Trump's re-election, French President Emmanuel Macron told the European Political Community that the bloc cannot delegate its security to the Americans, alluding to increased defence spending in Europe, which would largely benefit domestic producers such as BAE Systems and France's own Dassault Aviation. However, it is a particularly delicate time for Europe, beset by sluggish economic growth and political turmoil. Germany, the largest economy and presumably the largest potential spender on defence, is set to hold general elections over a dispute on how to manage its funds, as it faces revenue shortfalls and a multi-billion euro gap next year. France is also experiencing an economic slowdown, with the region as a whole seeing its composite PMI falling back into contraction in the preliminary November reading, continuing a descending trend since May. The lack of economic growth could substantially curtail increases in defence spending in Europe.​

Facing More Uncertainty Ahead?

Initially, European defence stocks rallied upon Trump's election under the supposition of increased defence spending in Europe. However, Trump's commitment to "quickly" end the war in Ukraine presents a new challenge. A potential agreement to scale down the war effort, similar to the Minsk agreements following the 2014 invasion of Donbas, could reduce demand for military equipment in Ukraine, impacting the bottom line of European defence stocks. Though the specifics of any deal and its impact on European defence budgets remain uncertain.

Last week, Russia launched an intermediate-range ballistic missile at Ukraine for the first time, highlighting Europe's vulnerable missile defence system. Early in the war, an untracked drone from the conflict penetrated deep into European territory before crashing into Croatia. Europe has pledged to increase missile defence spending, and BAE Systems' expertise in missile development and defence could give it an edge. In its recent earnings report, the British defence firm confirmed its projections for 12-14% sales growth this year. This week, BAE Systems will participate in the NTSA's ITSEC conference in Washington on the 27th, which is expected to unveil the latest in its training modules.​

BAE Systems Consolidating

Bae Systems has formed a double-top at 1415 GBX following a double-bottom at 1220, suggesting a potential continuation of its sideways range before an assertive breakout. An upside breakout could pave the way for an upward move towards the projected target of 1610 pence. Conversely, a breach of the support at 1220 may lead to a downward course to 1130 and perhaps the 1000 mark.​

Source: SpreadEx / BAE Systems

Key Takeaways

European defence stocks face uncertainty from escalating tensions in Ukraine and the re-election of Trump. His push for increased defence spending in Europe was initially perceived as bullish for European manufacturers, though his commitment to "quickly" end the war in Ukraine could reduce demand for military equipment, impacting their bottom line. An economic slowdown and political turmoil in Europe may also curtail increases in defence budgets. Still, Britain's BAE Systems has confirmed projections for 12-14% sales growth this year and is expected to unveil the latest in its training modules at the NTSA's ITSEC conference in Washington on the 27th.