Europe is re-arming, and its defence firms stand to profit

Frankfurt

GERMANY'S pledge to massively boost military spending after years of restraint that's left significant parts of its armed forces with outdated equipment is set to boost Europe's defence industry and sent stocks higher.

Europe's largest economy will inject 100 billion euros (S$152 billion) into a fund to modernise the German army, Chancellor Olaf Scholz said on Sunday (Feb 27) in a speech to the lower house of parliament. By 2024, Germany will spend at least 2 per cent of gross domestic product each year on defence, he added, in line with a Nato target the country has consistently failed to meet.

The move sparked gains of as much as 89 per cent for sensor and radar maker Hensoldt in early Frankfurt trading, while Rheinmetall, a producer of tanks and personnel carriers, soared 49 per cent to a record. French fighter jet maker Dassault Aviation jumped as much as 9.2 per cent while service provider Thales gained 16 per cent. Defence stocks had already moved higher last week after the Ukraine conflict escalated, fanning concern over Russia's offensive potentially expanding to other nations.

"Non-US Nato members must increase defence budgets by 25 per cent if they want to reach 2 per cent of GDP - clearly Germany represents the largest potential uplift in absolute terms," Jefferies analyst Chloe Lemarie wrote in a research note. "Defence consumables like ammunition and countermeasures should be the first products to experience restocking and order uplift."

Prior to the conflict erupting, tight military budgets weighed on the defence sector for years, until orders picked up substantially in the wake of Russia's annexation of Crimea in 2014. The deepening conflict in Ukraine could trigger more orders as well as an unblocking of talks to develop a future European combat plane.

Germany rebuffed for years calls to step up defence spending, leading the armed forces across the board to struggle to maintain key technology. Significant parts of defence apparel including fighter jets, tanks and submarines are non-operational because of repairs and problems sourcing replacement parts.

Germany has reduced the number of its battle tanks to 300 from around 5,000 since 1989 and the number of warplanes to 230 from more than 700, according to a report in Der Spiegel. Issues have also spread to the Bundeswehr's civilian operations. Former Chancellor Angela Merkel in 2018 arrived late at a G-20 summit in Buenos Aires after the airforce plane she was travelling on had to abort the trip due to a defect.

Defence companies will also benefit from a potential shift in Germany's export rules. On Saturday, Germany joined other nations in agreeing to send military equipment to Ukraine, breaking with a traditional rule not to make available German arms to conflict areas.

On Sunday, Scholz urged international cooperation to bolster Europe's ability to defend itself against risks like cyber attacks and remain technologically competitive. Contracts for the so-called Eurodrone project, a cooperation between Germany, France, Italy and Spain, were signed last week, he said. "We are also pushing ahead with the acquisition of the armed Heron drone from Israel," Scholz added. BLOOMBERG