Defence stocks have outpaced the global market this year by the most in almost a decade, on expectations of higher military spending by western governments and as ethically minded investors re-evaluate the sector.
An MSCI index tracking aerospace and defence shares has beaten a broader gauge of worldwide equities by 17 percentage points in dollar terms since early January. Such outperformance has occurred only two other times since 1999.
Russia’s invasion of Ukraine on February 24 has fuelled expectations of new government orders, higher revenues and stronger profits for companies in the defence sector. Analysts say the war has changed investors’ view of the industry, underscoring its role in facilitating international security.
In turn, shares of companies such as Lockheed Martin and the UK’s BAE Systems have rallied strongly, with FTSE 100-listed BAE alone up more than a third year-to-date. Supporting those gains, Vladimir Putin’s incursion of his neighbouring country has reignited a debate about the extent to which manufacturers of weapons and defence machinery should be excluded from environmental, social and governance focused portfolios.
Yet some have warned of premature enthusiasm over defence stocks, arguing that it is still too early to say when the promises of bigger budgets will translate into beefed-up bottom lines.
“There seems to be the beginning of some irrational exuberance about the industry. It is really too early to tell,” said Bill…
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