LIVE MARKETS-Reasons to be bullish about European defence next year

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REASONS TO BE BULLISH ABOUT EUROPEAN DEFENCE NEXT YEAR

Morgan Stanley sees a compelling case for a strong start to 2026 across Europe's defence sector, citing a mix of historical trends and fresh catalysts ahead.

"We believe the stars are aligned for a strong seasonal recovery," strategists at the U.S. bank write, pointing to a pattern of outperformance in the first quarter since Russia invaded Ukraine almost four years ago.

From 2022, 70-100% of annual gains have occurred between January and May, MS points out.

Valuations add to the appeal. Following a recent pullback, the sector trades at 17 times forward earnings, which Morgan Stanley views as unjustified given expectations for high-teens EPS growth and standout performers such as Rheinmetall RHMG.DE, forecast to grow earnings by 34-58% in 2026-2028.

Catalysts include rising European defence responsibilities, potential use of frozen Russian assets to aid Ukraine and accelerating German order activity.

Also, positioning is "far from stretched", the bank says, with more than half of global long-only funds holding zero exposure, suggesting room for inflows.

(Danilo Masoni)

EARLIER ON LIVE MARKETS:

LIQUIDITY BOOST TO GIVE EQUITIES A LIFT IN 2026 CLICK HERE

STOXX STEADY, HELPED BY FINANCIALS CLICK HERE

BEFORE THE BELL: DEFENCE AND RENEWABLES EYED IN EUROPE CLICK HERE

MARKETS RIDDLED WITH ANXIETY ON ALMOST-FED DAY CLICK HERE