Reinforcing gains for European defence stocks on the back of the Ukraine defence summit hosted by Kier Starmer were supportive comments from investment banks JPMorgan and Citi this morning.
European leaders gathered in London over the weekend for a defence summit following Friday's Oval Office row between US president Donald Trump and Ukraine counterpart Volodymyr Zelenskyy.
Shares in defence companies were big movers on Monday on the back of the UK summit, where PM Starmer and French president Emmanuel Macron confirmed that the UK and France would lead a "coalition of the willing" to support Ukraine and help end the war with Russia.
In a note entitled "Europe’s rearmament cycle...now it’s for real", JPMorgan raised its share price targets by an average 25%, including Babcock International PLC (LSE:BAB) to 900p from 760p, BAE Systems PLC (LSE:BA.) to 1,725p from 1,630p, QinetiQ Group PLC (LSE:QQ.) to 570p from 535p, and Rolls-Royce Holdings PLC (LSE:RR.) to 900p from 655p.
European names getting a hike included Dassault Aviation to €280 from €225, Leonardo to €44 from €33.5, Rheinmetall to €1,200 from €800, and Thales to €220 from €195.
In March last year, a report from JPM argued that the continent's rearmament cycle would last for at least a decade as it "needed to address 30 years of underinvestment in defence", predicting more local production would be needed as the US might be less willing to subsidise Europe’s defence.
"In our view, the events of the last two weeks have turbo-charged this thesis," the JPMorgan defence and aerospace analysts said, including Denmark and the UK both announcing significant increases in their defence budgets and Germany’s new Chancellor has proposing a new €200 billion special defence fund for Germany alone.
"There are 30 European countries in NATO and we expect many of them will soon commit to much higher defence spending.
"We expect significant increases in consensus estimates/company guidance in the coming months and years.
"We also expect the European defence sector to further re-rate as investors underwrite strong growth and visibility."
Citi analysts noted that at the end of the summit Starmer briefed a four point plan: 1) To keep sending military aid to Ukraine 2) to include Kyiv in any peace talks 3) to deter any future Russian aggression 4) to form a 'coalition of the willing' to guarantee peace in Ukraine.
"There were efforts to emphasize the continued importance of US involvement. However, there is a clear view in Europe that a peace negotiated bilaterally between Russia-US, would be unlikely to hold and risks a repeat of the failed Minsk agreements.
"Ultimately, if Europe is to position Ukraine for a 'just and lasting' peace, it will need to provide significant military capability. Military restocking and recapitalization of the industrial base increasingly looks like a pan-European fiscal priority," the Citi note said.
Also noted was that the Sunday Times yesterday reported that Chancellor Rachel Reeves has adjusted the remit of the £27.8 billion National Wealth Fund so it can be spent on defense.
"The fund was set up to invest in (and encourage private investment in) infrastructure projects, so it seems likely it will be used to provide investment in the UK defense industrial base (rather than in pure defense procurement) - i.e. it will probably not directly give more sales to UK industry, but indirectly by increasing the capacity to allow more procurement to be spent within the UK, as well as reducing the private capex spend required to increase capacity," Citi said.
The bank's analysts said they regard it as "a positive for UK defence", where QinetiQ makes 66% of its total sales, Babcock 63%, BAE Systems 20%, Leonardo 15-20% and Thales 5-10%.
As well as FTSE 350 giants in London and across Europe, mid- and small-cap names were also boosted, including chaff maker Chemring Group (LSE:CHG), helmet and gas mask manufacturer Avon Technologies PLC (LSE:AVON) and sonar, torpedo and communications specialist Cohort PLC (AIM:CHRT).
** Update: Adds extra detail and comment **