Prime Minister Keir Starmer’s announcement that the government will increase defence spending should provide a significant lift to European defence stocks, according to Matt Dorset, equity analyst at Quilter Cheviot.
Starmer has said the government will raise spending to 2.5% of GDP by 2027, or 2.6% including intelligence agencies, and 3% during the next parliament.
The plans have been prompted by pressure on European countries from Donald Trump’s administration to bear more of the costs of their own security.
These ‘ambitious targets’ have implications for investors, Dorset explained.
“It is clear that Europe, including the UK, needs to materially ramp up defence spending as Trump appears to be stepping back from an active role in Europe, especially given significant underspend on defence in recent decade,” he said.
“Mark Rutte, NATO Secretary General, has indicated that the new NATO spending target will be ‘considerably more than 3% of GDP’, with various European leaders echoing similar sentiments.
“European defence stocks will be significant beneficiaries in our view. Larger defence budgets will not only increase demand but also likely focus on boosting Europe’s own defence production rather than relying on US exports.”
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Dorset added there are a number of UK companies with exposure to defence spending that will be ‘clear beneficiaries’.
“BAE Systems is the most obvious example, as it is the UK’s preeminent defence company involved in the production of submarines, fighter jets, combat vehicles, missiles, electronic warfare systems, naval ships, and many more,” he said.
“66% of Qinetiq’s sales are in the UK and the business is closely connected to the research and services of the Ministry of Defence, having previously been state owned. This puts the business in a strong position to benefit from increased investment in defence spending.
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“Similarly, 62% of Babcock’s sales are in the UK so it is likely to benefit considerably from an increase in defence spending,” Dorset continued.
“Chemring has global exposure, but 45% of its sales in the UK, making it a likely material beneficiary of increased UK defence spending. It provides various technological solutions for defence markets, including expendable countermeasures to protect air and sea platforms from missile threats and sensor technology.”
