BAE and Rolls-Royce in the line of fire as defence stocks tumble in £12bn rout

Europe’s defence and aerospace stocks suffered a £12billion sell-off yesterday amid concerns that their record-breaking run could be reaching its peak.

Britain’s BAE Systems and Rolls-Royce were among those in the red after analysts questioned whether steep increases in valuations could continue.

A gauge of European defence stocks, which includes the UK-listed firms, fell 3.9 per cent – its biggest slide for more than a year. 

The index has nearly doubled in value over the past couple of years after Russia’s invasion of Ukraine bolstered prospects for increased military spending on the continent.

And the prospect of Donald Trump weakening America’s commitment to protecting Europe has further concentrated minds in European capitals. 

Rout: A gauge of European defence stocks, which includes the UK-listed firms, fell 3.9% – its biggest slide for more than a year

It means Nato members are under increasing pressure to meet long-neglected commitments to spend 2 per cent of their GDP on defence.

That has turbocharged defence stocks across the continent and in the City. They are now trading at a 45 per cent premium to the broader European equity market, according to analysts at Goldman Sachs.

And it has helped the firms, which have for years complained of being undervalued compared with Wall Street’s big arms makers, to make up some of that difference. Goldman’s analysts said that the sector was in a ‘super-cycle’.

A separate report from Bernstein said having traded at a more than 50 per cent discount to US peers, the sector had ‘done something that would have been unimaginable 27 months ago: they have essentially closed the valuation gap’.

Yesterday’s fallers included Germany’s Rheinmetall, which suffered a 6.9 per cent slump knocking £1.5billion off its value.

France’s Thales lost 4.9 per cent, also reducing its market capitalisation by about £1.5billion.

In London, BAE Systems – maker of warships, fighter jets, submarines and shells – slid by 4.5 per cent. 

That took £1.8billion off its valuation. But it is still worth twice as much as before the Ukraine war. 

Rolls-Royce fell by 3.9 per cent, or £1.4billion, though that scarcely dented its dizzying rise under chief executive Tufan Erginbilgic, who has overseen a quadrupling in the share price since he took over at the start of last year.

Other UK-listed fallers were Babcock, down 2.5 per cent, Chemring, down 5 per cent, and Senior, which was 2 per cent off.

However, a number of analysts were still broadly positive about the sector.

Nick Cunningham, managing partner at equity research firm Agency Partners, said: ‘The reality is that European rearmament is only just getting going, and these stocks have a long way to go yet in terms of growth.’