Market Insight: Despite the major price weakness, defense stocks still belong in the portfolio

“What goes up must come down” – this stock market saying currently applies as well to stocks as it does to stocks in the defense industry. From the start of the Ukrainian war in February 2022 to mid-January this year, the prices of European defense stocks rose by an average of 260 percent. In Germany, Rheinmetall shares even shot up by 1,800 percent.

But since then, defense stocks, measured by the corresponding industry index in the Stoxx Europe 600, have lost a peak of 17 percent. Rheinmetall shares have lost 60 percent since mid-January and are by far the worst value in the German leading index Dax.

So the big hype surrounding defense stocks is obviously over. They still belong in the depot.

Götz Albert, chief investment strategist at the Lupus Alpha fund house, puts it this way: “The political tailwind for European defense capability and the long-term investment programs clearly continue to speak for the industry.”

In fact, according to data from the EU Council, the 27 countries of the European Union are expected to invest 454 billion euros in defense this year. That would be almost nine percent more than last year. Defense spending is expected to continue to rise in the next few years.

It is therefore clear that the industry will receive even more orders. However, investors have recently become impatient. At the beginning of the month, Rheinmetall shares recorded a spectacular daily loss of up to 17 percent. This was triggered by a sales forecast that was lowered for the second time because a major order from the Bundeswehr was postponed.

But this is not a serious problem. Matthias Beil, Head of Private Banking at Sutor Bank, says: “The orders have not disappeared, they come later.”

It is also noteworthy that at the beginning of the year, investors were primarily concerned that companies like Rheinmetall would not be able to process their massive order backlogs. It is difficult to understand that a postponement of orders would cause further price losses. And it is a sign that the downward price swings are even more severe than the news suggests.

It's hard to say whether stocks have bottomed out now. According to Beil, anyone who invests in the industry needs “perseverance”. He also believes that the industry's growth story is not yet over.

According to Albert from the Lupus Alpha fund house, defense stocks have now “come into normalcy”. This means that investors should no longer rely on big hype, but should fundamentally evaluate defense companies like any other company.

Active fund houses such as Lupus Alpha not only pay attention to the relevant German defense companies such as Rheinmetall, but also to the sensor specialist Hensoldt and the gearbox manufacturer Renk. They expand the definition of armaments to include companies in areas such as satellite communications, robotics, electronics or cyber security.

Investors should therefore not confuse the setbacks in the defense industry with the end of the defense story. But it's good to take a more sober look at the industry.