European defence stocks such as BAE Systems PLC could see renewed support following the new Iran war, according to Morgan Stanley, which says heightened geopolitical risk is a "key driver of defence spending".
The bank said the weekend’s strikes by the US and Israel on Iran, which retaliated via drone and missile attacks against various nations, reinforce the European rearmament theme.
With the US administration likely focused on the region, it could “reinforce the need for Europe to focus on its own security and strategic autonomy”.
Defence and aerospace analyst Ross Law highlighted particular demand for “air and missile defence capabilities”, already a priority given the Russia-Ukraine conflict.
He said highlighted BAE Systems, which generates about 10% of sales from Saudi Arabia and Qatar and around 45% from the US.
Italy's Leonardo has roughly 25% US exposure and Gulf links via Typhoon and MBDA, while France's Dassault Aviation sells Rafale jets to the UAE, Qatar and Egypt. Norway's Kongsberg also derives about a quarter of sales from the US.
Prolonged instability could “drive upside pressure to defence budgets in the gulf region”, while in the US the administration has indicated an ambition to raise defence spending by “circa 50% to $1.5 trillion for FY27”.
On aerospace, the impact “likely depends on the longevity of hostilities”, with risks around supply chains, energy costs and air traffic demand.
BAE shares were up 5.1% on Monday afternoon, while other FTSE-listed defence stocks were also being lifted, including Avon Technologies PLC (up 3.5%), Chemring Group (up 1.9%), QinetiQ Group PLC (up 1.5%) and Babcock International PLC (up 1.4%).