Defense stocks extend gains as Syria strikes intensify

[November 17, 2015]  By Lionel Laurent

LONDON (Reuters) - Last week's Paris attacks kept rippling through financial markets on Tuesday, with investors buying up aerospace and defense stocks as fresh air strikes hit Islamic State bases in northern Syria.

The STOXX Europe total market aerospace index was up 3 percent at 0500 ET, leading to a total gain of 4.2 percent since the start of the week, as investors bet on an intensification of bombing in the Middle East. On Monday, French President Francois Hollande pledged more spending on security in response to Friday's attacks, claimed by Islamic State.

Top gainers in aerospace and defense included Zodiac Aerospace and Rolls Royce, both up over 4 percent, and Thales and BAE Systems, up around 2 percent.

France invoked the European Union's mutual assistance clause on Tuesday and asked partners for military help and other aid in missions in the Middle East and Africa, while French warplanes conducted a second consecutive night of strikes in Syria.
 

"We expect extra spending on policing, private security and military intervention," Citi economists wrote in a note to clients on the impact of the Paris attacks.

The aerospace industry has been under pressure from constraints on defense budgets and general government belt-tightening since the 2008 financial crisis, although recent comments appeared to indicate a brighter outlook on spending.

BAE Systems said earlier this month that increases in defense spending in the United States and other markets would help in the longer term, even as it announced slower production of its Typhoon fighter jet and capacity cuts.

Supplier Meggitt issued a profit warning in October and said low oil prices had hit demand for spare aircraft parts. Organic sales in its military division fell in the third quarter and the company said it had been hit by a number of program deferrals.

Civil aerospace has also faced pressures. Rolls-Royce this month issued its fourth profit warning in just over a year after a slowdown in Asia hit demand for servicing older aircraft engines.

Despite the boost to sentiment, some questioned how substantially the outlook for the industry had changed.

"There may have been a help to sentiment but (defense) budgets are still constrained as they are," said Edward Stacey, an analyst at Haitong Securities.

(Editing by Catherine Evans)

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