Heightened geopolitical tensions around the world have prompted Shore Capital to start coverage of the defence sector with bullish recommendations on Qinetiq, BAE Systems and Chemring.
Higher defence budgets and closer Western collaboration should mean structural growth over the long term, says the broker, with the defence sector likely to outpace GDP growth.
“As interest rates rise and discretionary spending falls, the defence sector provides a credible alternative to high-beta stocks.
“Multi-year defence programmes provide excellent visibility and significant barriers to entry protect the incumbents.
Another growth kicker is likely to be space, reckons Shore Capital.
“Capabilities that are not considered traditional defence products, including adapting military technology for commercial use, provide a less regulated revenue stream, that can deliver strong returns sector participants.”
QinetiQ is the top pick given its asset-light business model and current undervaluation with ShoreCap seeing 41% upside.
BAE Systems and Chemring also receive buy ratings with Avon Protection a sell due to demand-side and supply-side concerns.