European funds more than double investments in defense companies due to war in Ukraine
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European funds have more than doubled their investments in defense companies' stocks since Russia's full-scale invasion of Ukraine. This increase reflects the new priorities of European countries to strengthen their defense industries amid threats from Russia, citing the Financial Times.
According to the latest data from Morningstar Direct, investments in this sector have risen from €3.2 billion in the first quarter of 2022 to €7.7 billion.
The growth in investments is largely attributed to the surge in defense companies' stock prices following Russia's full-scale attack on Ukraine.
"The situation in Ukraine has very much brought to the fore this idea of, 'Can we actually defend ourselves?'," said Sonja Laud, Chief Investment Officer at Legal and General Investment Management.
It is reported that a significant portion of investors agree with governments' positions, which emphasize the positive social impact of supporting defense manufacturers in today’s geopolitical environment. However, the publication notes that discussions continue regarding whether defense companies can be considered part of ESG investments, which focus on environmental, social, and governance criteria.
The number of European ESG funds holding more than 5% of defense companies' shares has risen from 22 to 66 over the past two years.
The share of assets in this sector remains minimal (less than 1% of the total €1.5 trillion in assets). Nonetheless, despite this, the defense sector is becoming increasingly attractive to investors.
FT reports that the MSCI Europe Defense Industry Index has increased 1.8 times since the beginning of 2022, further enhancing the sector's appeal. Meanwhile, politicians in the UK and Europe are urging investors to continue supporting the defense sector.
It is also reported that investments in the defense sector are not only growing in Europe. In the US, investments in this area among ESG funds are also on the rise, reaching €1.2 billion in the second quarter of 2024.
Defense sector investments
Amid rising geopolitical threats, investments in defense companies in Europe and the US have significantly increased following the start of Russia's full-scale war against Ukraine. The defense sectors of these countries are becoming stronger, as weapons production levels rise. These weapons are divided between those kept within the states for bolstering their own defense industries and those sent to meet Ukraine's needs as it continues to fight against Russian aggression.
NATO is collaborating with various defense companies to increase arms supplies to Ukraine.
Earlier in 2024, Ukraine's Defense Minister Rustem Umerov proposed cooperation between European defense companies and Ukrainian ones.
As a reminder, Umerov also called on leading global defense and technology companies to invest in weapons production in Ukraine.
