Shares in defence companies soared today as a leading US broker said Russia’s attack on Ukraine had changed the landscape for the weapons makers.
BAe Systems PLC led the risers today, gaining 14% following an upgrade on Friday for the aircraft, warship and cybersecurity group by JP Morgan, with the broker upgrading others across the sector today.
Describing it as a new era for defence spending, the US broker raised its view on Qinetiq to ‘neutral’ while retaining its overweight stance of ‘Babcock’.
JPM said Russia’s actions have fundamentally changed the background for defence spending, which is now going to be much higher than previously expected.
Germany, for example, made three game-changing announcements at the weekend, says the broker.
It will increase its defence spending to a minimum of 2% of GDP going forward, compared to 1.3% in 2021; will invest €100bn to modernise its military through a special fund and will send weapons to Ukraine and reversing a policy of banning sales to conflict zones.
Other countries are likely to follow suit, suggests JPM, which expects every European to reassess its needs and especially in Scandinavia and Eastern Europe.
President Joe Biden is also likely to ask for a minimum of a 5% rise in US defence spending, but could go for more suggests JP Morgan.
JP Morgan also expects some easing of the sector’s ESG pressure as more investors accept that “defence” is needed to preserve peace and democracy.
Price targets across the sector have been increased by an average of 25% by JPM with meaningful earnings upgrades ahead.
Shares in BAe today jumped 14% to 742.2p, Qinetiq by 12% to 293.8p and Babcock by 7% to 328.1p.