Defense and cybersecurity stocks are seeing a sharp rise in values as investors take note of pledges by the EU to boost defense spending and governments warn of an increased threat of cyber intrusions following Russia’s invasion of Ukraine.
US stock markets seesawed again on Monday as the war in Ukraine escalated. Most of the major US markets closed lower after regaining some of their losses, but defense contractors continued to gain as investors bet their businesses would benefit from the conflict.
Raytheon Technologies, the US defense giant and maker of the Stinger ground-to-air missile that Germany has pledged to supply to Ukrainian forces, has seen its shares price increase more than 10% since the invasion began last Wednesday. Raytheon’s stock rose over 4.6% on Monday and has risen more than 18% this year.
Lockheed Martin, the maker of the F-35 fighter jet, advanced more than 5.4% on Monday. The company, with Raytheon, is the manufacturer of the Patriot missile defense system set to be deployed with the Nato battlegroup in Slovakia.
Northrop Grumman, leading manufacturer of attack and surveillance drones, saw its stock rise close to 7% on Monday, after rising 3% since the Ukrainian conflict began. Huntington Ingalls Industries, the largest US military shipbuilder, is up over 7%.
By contrast, the US Dow Jones Industrials has risen 760 points since 23 February to close at 33,892 on Monday.
Outside the US, Britain’s BAE Systems, the largest defense contractor in Europe, Germany’s Rheinmetall, France’s Thales and Italy’s Leonardo have all seen their share prices rise sharply.
The jump in defense stocks comes after German Chancellor Olaf Scholz said that defense spending in Europe’s biggest economy will be increased to 2% of gross domestic product, from an estimated 1.5% in 2021.
While the US and its allies haven’t intervened in the conflict on the ground, they have been supplying arms and financial backing.
Over the weekend, Germany said it would supply Ukraine with 1,000 anti-tank weapons and 500 Stinger surface-to-air missiles so it can defend itself against Russia, and it vowed to channel about $113bn into its military this year.
“If Germany is feeling pressure to bolster its military and defense systems in this way, other countries are likely to follow suit,” said Investor Place in a note.
“This means that companies that produce military technology and weapons are likely to see a significant spike in demand throughout the coming months. Wall Street will be keeping a close watch on defense stocks as the industry prepares for a boom.”
But defense analysts have also raised concerns that some companies, including Raytheon, also supply Russian civil use aircraft makers. In a speech last week, Joe Biden said his administration’s actions and those of allies aimed to “cut off more than half of Russia’s hi-tech imports, and we’ll strike a blow to their ability to continue to modernize their military”.
That comes as defense contractors watch for signs that the Pentagon will ask Congress for additional funding to pay for increased costs, including the deployment of 7,000 US troops to Europe and the cost of additional surveillance flights.
“Russia’s actions in Ukraine have renewed the arguments for higher US defense spending and I think we’re likely to see it grow more than previously expected,” said Todd Harrison, director of defense budget analysis at the Center for Strategic and International Studies.
Congress is set to approve a Department of Defense (DoD) budget of $740bn for 2022-2023. The DoD has been in the process of shifting focus to the Asia-Pacific region. But Russia’s invasion of Ukraine could alter that calculation, Harrison said.
“I think we’re going to see more of split focus around counter-Russia in Europe in the short term and countering China in the Pacific in the long term.”
While the conflict stands to benefit companies that rely largely on defense work, shares of cybersecurity software companies have also risen on expectations of increased spending on security-related services.
Among exchange-traded (ETF) funds that track the sector, the Global X Cybersecurity ETF rose 3.6% and is up more than 12% over the past three trading sessions. Morgan Stanley wrote that the heightened geopolitical tension “will continue to provide a strong tailwind for cybersecurity stocks”.
Among companies that stand to gain are the cloud storage security firm Zscaler, Crowdstrike Holdings, which markets anti-ransomware services, and Fortinet, a maker of network security systems.
“Anytime there is a new threat announced, or there’s a hack or ransomware attack, that’s effectively an advertisement for cybersecurity as something that companies and other organizations need to be investing in,” Hilary Frisch, an analyst at ClearBridge Investments, told Bloomberg this month.
