The Peace Dividend: Rotation into the European Defense Sector

By Ion Jauregui - ActivTrades Analyst
The start of 2025 has brought with it a change in the narrative of financial markets. While the United States continues to be marked by political uncertainty and protectionist measures, Europe has experienced an unusual inflow of capital, largely driven by the possibility of a ceasefire in Ukraine and the so-called “peace dividend” narrative.

The impact of the peace dividend
The concept of the “peace dividend” refers to the reallocation of economic resources that occurs when geopolitical tensions subside, which in theory should benefit traditional sectors such as infrastructure, consumer and technology. However, the market has shown a different reaction: far from weakening, the defense sector has continued to attract investors.
European companies such as BAE Systems, Thales and Rheinmetall have seen their share prices rise, reflecting the perception that countries in the region will continue to increase their defense spending despite a possible ceasefire. The reconfiguration of the geopolitical scenario does not eliminate the need to maintain strategic investments in the arms sector, especially with the strengthening of alliances such as NATO and the growing strategic autonomy of the European Union.

- BAE Systems plc (Ticker AT: BA.UK): London Stock Exchange.
- Rheinmetall AG (Ticker AT: RHM.GE): Frankfurt Stock Exchange.
- Thales Group (Ticker: HO): Euronext Paris.
- Leonardo S.p.A. (Ticker AT: LDO.IT): Milan Stock Exchange.
- Dassault Aviation (Ticker AT: DSY.FR): Euronext Paris.
- Indra Sistemas, S.A. (Ticker AT: IDR.ES): Madrid Stock Exchange.
- Saab AB (Ticker AT: SAABB.SE): Stockholm Stock Exchange.
- Kongsberg Gruppen ASA (KOG): Oslo Stock Exchange.
- Hensoldt AG (HAG): Frankfurt Stock Exchange.
- QinetiQ Group plc (QQ): London Stock Exchange.

The effect on European indices
The Stoxx Europe 600 has recorded positive flows in the first weeks of the year, with an emphasis on industrial and defense stocks. The CAC 40 and the DAX have shown rallies, driven by the revaluation of companies in the arms and security-related technology sectors.
The key question for investors is whether this asset rotation is a structural trend or simply a speculative rebound. Although recent flows suggest an increased interest in European equities, the persistence of these movements will depend on the evolution of US trade policy, the stability of energy prices and the response of European governments to new security and defense challenges.

Opportunities and risks
For investors, the current situation presents both opportunities and challenges. Defense investment has proven to be resilient throughout history, but the risks of economic fragmentation stemming from US trade policies could generate volatility in the markets.
In this context, active managers may benefit from the greater dispersion of returns across sectors, while passive investors may struggle in the absence of a clear macroeconomic trend. The key will be to assess whether the capital inflow into Europe is a reflection of a cycle change or a short-term tactical move.

Euro50 Analysis
If we look at the chart of the EuroStoxx50 we can see that it has had a bullish evolution during last week closing the week flat. Since February 4th a widening of the averages has been developing. RSI is currently in its middle zone. The control point (POC) is well below the current price of 5,486 points around 5,345 points, a price zone visited last week. It is very likely that the index will try to test the highs of 5,520 points reached last week, if the index accumulates enough volume its next milestone to reach would be close to 5,625 points. If the index does not pierce the price will test its current low of 5,450 points being its second support zone at 5,380 points.

Conclusion
The “peace dividend” is not leading to disinvestment in the defense sector, quite the contrary: the markets are betting on reinforced security in Europe. The question remains open: is there a structural rotation towards defensive sectors or simply a speculative rally in an environment of global uncertainty? Developments over the coming months will be crucial in determining the direction of these movements on European markets.




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