LONDON, Feb 28 (Reuters) - European defence stocks surged in a falling market on Monday after news that Germany will increase its military spending in response to Russia's invasion of Ukraine.
German Chancellor Olaf Scholz said on Sunday that defence spending in Europe's biggest economy will be increased to 2% of gross domestic product, from an estimated 1.53% in 2021, according to NATO statistics.
The country has resisted pressure to increase its military spending in the past, owing to its 20th-century history and despite international pressure to do so. An increase to 2% would match targets set out by NATO in 2006.
Shares in Britain's largest defence company, BAE , and Germany's Rheinmetall both surged to RECORD highs shortly after Monday's open and were last up 14.7% and 29% respectively. Both have large exposure to the weapons and ammunition market.
France's Thales added 12% and Italy's Leonardo gained 13.4%, while shares in German military sensor maker Hensoldt soared by more than 43% in early trade.
The pan-European STOXX 600 index, meanwhile, fell 1.3%.
Other stocks exposed to the defence sector outperformed the wider market. UK science and engineering company QinetiQ, which operates in the defence and security markets, rose 10% while shares in Ultra Electronics were up 3.1%.
Defence stocks have come under pressure in recent years in the face of increased investor focus on ESG issues, though the crisis in Ukraine could lead to a rethink.
"Russia’s invasion of Ukraine has fundamentally changed the landscape for the European Defence Sector (EDS)," J.P Morgan analyst David Perry said in a note on Monday.
"Second, with regard to the sector’s ESG credentials, more investors may accept that 'defence' is needed to preserve peace and democracy, driving a re-rating of EDS," he added. (Reporting by Lucy Raitano and Julien Ponthus Editing by David Goodman )