European defence stocks have surged as the continent’s top political leaders gather for an emergency summit – so which should you invest in?
Amid growing calls from the US to boost military spending, Sir Keir Starmer said he would be ‘ready and willing’ to deploy British troops on the ground in Ukraine to enforce any peace deal with Russia.
The comments came after Mark Rutte, secretary general of Nato, said member countries would need to spend ‘considerably more’ on their armed forces following pressure from Donald Trump.
The prospect of higher European demand for everything – from weapons and ammunition to fighter jets, tanks and warships – sent British defence giant BAE Systems surging 9pc on Monday, making it the biggest riser in the FTSE 100 in London.
Jet engine maker Rolls-Royce rose nearly 2pc to a record-high while mid-cap defence tech group Chemring was up 10pc and rival QinetiQ climbed more than 6pc.
BAE has been one of the biggest winners from Russia’s invasion of Ukraine and the subsequent jump in global defence spending. Its stock price has more than doubled since Russian tanks rolled across the border three years ago.
In Europe, German arms manufacturer Rheinmetall hit a record high after gaining 14pc while Sweden’s Saab shot up 16pc, Italian aerospace firm Leonardo jumped around 8pc and French group Thales added 7.8pc.
‘Shares in defence companies had already rallied hard since Russia invaded Ukraine as investors took the view that the shocking events would spur governments around the world to fortify their own defences. Rutte’s comments effectively confirm this line of thinking,’ said AJ Bell investment director Russ Mould.
The prospect of higher European demand for everything – from weapons and ammunition to fighter jets, tanks and warships – has made stocks in defence firms surge
President Trump has demanded other Nato countries spend 5pc of their gross domestic product (GDP) on defence, a massive increase on the previous 2pc target agreed more than a decade ago.
He claims other members of the alliance rely too heavily on US firepower for protection.
While such an increase is considered unlikely, Rutte said Nato members would need to raise spending to ‘considerably more than 3pc’ of GDP. The UK currently spends 2.3pc of its GDP on defence.
Signs of a shift in European capitals appeared to already be underway as reports emerged that the Danish government was considering upping defence spending to 3pc of GDP.
The country’s prime minister Mette Frederiksen told reporters that the continent must ‘increase military support for Ukraine, produce more, and do it faster’.
Meanwhile, Polish prime minister Donald Tusk said that if Europe did not ramp up defence spending now the continent would need to ‘spend ten times more’ in the future. He added that Poland would continue its current rate of defence spending, which sits at 5pc of the country’s GDP.
European officials have been spooked by peace talks between the US and Russia which are due to take place in Saudi Arabia on Tuesday, effectively cutting continental leaders and Ukraine itself out of the process.
French President Emmanuel Macron called an emergency gathering of European leaders in Paris yesterday in response to the growing crisis.
Sir Keir and Macron are among those backing the creation of a European peace-keeping force in Ukraine to enforce any ceasefire with Russia and stave off the threat of a future invasion.
It echoes comments from Ukrainian president Volodymyr Zelensky who said Europe needed its own army to compensate for the US pull-back.
It comes ahead of a meeting between the Prime Minister and Trump in the coming days – during which Sir Keir is likely to try and dissuade the President from scaling back security guarantees in Europe.
Here we look at some of the major UK and European defence companies and whether investors should buy their shares amid the turmoil.
BAE is involved in manufacturing the F-35 fighter jet and is leading the Dreadnought submarine project for the UK’s nuclear deterrent programme
BAE Systems – London, UK
BAE Systems – one of the biggest defence companies in the world – makes submarines, fighter jets, combat vehicles, missiles, electronic warfare systems and naval ships.
The London-headquartered company is involved in manufacturing the F-35 fighter jet and is leading the Dreadnought submarine project for the UK’s nuclear deterrent programme.
Shares in BAE Systems have more than doubled since Russia invaded Ukraine.
And it is one of the firms most likely to benefit as European countries ramp up their defence budgets.
Richard Hunter, at Interactive Investor, said the FTSE 100 firm is ‘one of the preferred plays’ in the sector.
‘The group enjoys a diversity by both product and geographical region,’ he said.
Morningstar analyst Michael Field said BAE is one of the most ‘attractive’ defence stocks. ‘It is a pure play on the defence sector with embedded positions in areas such as the F-35 fighter jet and Tempest Eurofighter,’ he said.
Matt Dorset, equity analyst at Quilter Cheviot, said that ‘BAE’s scale, relationships, and diverse range of products provide a clear opportunity to capture increased demand from higher European defence equipment spending’.
Of the 18 analysts covering the stock, four rate BAE as a ‘strong buy’ while seven tip it with a ‘buy’ rating. Six more rate it as a ‘hold’ and only one as a ‘sell’.
Rolls-Royce – London, UK
Shares in London-headquartered Rolls-Royce are up more than six-fold since the invasion of Ukraine.
During that time, the FTSE 100 company has undergone a major revamp under the leadership of chief executive Tufan Erginbilgic.
Rolls-Royce has less exposure to defence than rivals such as BAE as only 26pc of its sales come from those operations – and much of that is outside the UK and Europe.
The company is primarily focused on the civil aerospace market. But it will still benefit from an uptick in defence spending across Europe.
‘The company produces engines for various combat vehicles, including fighter jets, submarines, ships and helicopters, all of which could see an uptick in demand if equipment spending increases,’ Quilter Cheviot’s Dorset said.
Rolls-Royce has ‘been on something of a tear recently’, Interactive Investor’s Hunter said.
‘Shares have risen by 460pc over the last two years, with no immediate lack of investor appetite in sight,’ he said.
Aarin Chiekrie, an equity analyst at Hargreaves Lansdown, said: ‘Much progress has been made in a short period, and the group’s 2027 mid-term targets now look well within reach.
‘With dividend payments set to be reinstated this year, there are plenty of reasons for investors to remain positive about Rolls-Royce’s future.’
Brokers on average are bullish on Rolls-Royce, with 12 analysts out of 18 rating it as a ‘strong buy’ or a ‘buy’.
UK-based Chemring makes tech that can protect against missiles as well as explosive, chemical and biological detection tools
Chemring – Romsey, UK
Chemring is aiming to double annual revenues to £1bn by the end of the decade.
Analysts said the target is looking increasingly realistic as sales are set to be boosted by increased defence spending.
That comes after the company already revealed a record order book at the end of last year.
The company makes tech that can protect against missiles, as well as explosive, chemical and biological detection tools.
The firm, which is headquartered in Romsey, Hampshire, has seen its share price rise more than 30pc since the outbreak of war in Ukraine.
Its ‘exposure to specialist areas such as electronic warfare, secret cloud and cyber security’ set it apart from rival defence firms, analysts said.
Quilter Cheviot’s Dorset said that as Chemring makes 45pc of its sales in the UK and 17pc in Europe, it is ‘likely a material beneficiary of increased defence spending’.
‘Chemring provides various technological solutions for defence markets, including expendable countermeasures to protect air and sea platforms from missile threats and sensor technology,’ he said.
‘Chemring is already providing military capabilities to Germany, France Italy and Spain and is gaining increased traction in Europe, which will only be bolstered by the expected increase in demand.’
Of the five analysts covering Chemring, all are positive, with two marking it as a ‘strong buy’ while the remaining three give it a ‘buy’ rating.
Rheinmetall – Dusseldorf, Germany
Based in Dusseldorf, Rheinmetall is Germany’s largest arms manufacturer, constructing a range of military products ranging from battle tanks, anti-aircraft guns and tactical equipment for infantry.
One of its most recognisable products is the Challenger 2 main battle tank, currently used by the British Army.
Since the invasion of Ukraine in February 2022, the company’s share price has rocketed by some 800pc to a new record high.
The company is a key partner of the Ukrainian military, supplying it with ammunition for its tanks and air defence systems as well as training the country’s maintenance and repair specialists.
Of the 18 analysts who cover the Rheinmetall stock, six of them rate it as a ‘strong buy’ alongside another nine who have it with a ‘buy’ rating, suggesting the market believes it has further to rise in the future.
Charu Chanana, chief investment strategist at Saxo Bank, said Rheinmetall could be among the companies which ‘may benefit’ from increased defence spending by Nato countries if they respond by calls to the US to up targets.
Based in Dusseldorf, Rheinmetall is Germany’s largest arms manufacturer, constructing a range of military products ranging from battle tanks, anti-aircraft guns and tactical equipment for infantry
Saab – Stockholm, Sweden
Swedish group Saab counts missile systems, radars and airborne surveillance among its main products.
In Ukraine, its most famous product is undoubtedly the NLAW, a shoulder-mounted missile launcher designed to destroy tanks and other armoured vehicles.
The UK supplied more than 2,000 NLAWs to the Ukrainian military in the lead-up to the invasion and another 1,600 shortly after the war began after the compact and lightweight launcher proved devastating against columns of Russian armour.
Demand for Saab’s products has pushed its share price up nearly 400pc since the February 2022 invasion.
Analysts are mostly bullish on the stock, with two rating it as a ‘strong buy’ and another two at ‘buy’ compared to four rating it a ‘hold’ in a sign that further rises could be possible.
In a note on Monday, analysts at investment bank Citi said the company was witnessing ‘exceptionally high demand’ for its products and that the current share price was ‘an attractive entry point’ for buyers.
Thales – Paris, France
Paris-based aerospace group Thales specialises in technology such as electronic warfare, air defence and communications systems.
Its Ground Master 200 radar system was previously donated to Ukraine by the French government to boost the country’s air defences.
In September last year, the UK government…
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