By Samuel Indyk and Sophie Kiderlin

LONDON, April 20 (Reuters) – Investors have cooled on European defence stocks as profit taking and stretched valuations collide with growing uncertainty over the future of warfare, with the Iran conflict again highlighting the effectiveness of low-cost drones.

MSCI’s Europe Aerospace and Defence Index dropped 9.2% in March, its ‌biggest monthly fall in five years, as a previously stellar trade began to unwind.

Defence stocks typically rally at the outbreak of war – such as after Russia’s full-scale ‌invasion of Ukraine in 2022 – or when U.S. President Donald Trump pressures NATO allies to raise military spending.

But that has not been the case since the Iran conflict erupted on…