JP Morgan hikes targets for defence stocks on European spending hopes

(Sharecast News) - JPMorgan has hiked target prices across the listed European defence sector by an average 25% on the back of an anticipated "rearmament cycle" across the continent. JPMorgan raised target prices for the following UK stocks: Babcock (from 760p to 900p), BAE Systems (from 1,630p to 1,725p), IMI (from 2,275p to 2,290p), Qinetiq (from 535p to 570p) and Rolls-Royce (655p to 900p). All five stocks are rated 'overweight' by the bank.

In March of last year, JPMorgan predicted that a rearmament cycle in Europe would last for at least a decade due to a new political consensus that the continent would need to address "30 years of underinvestment in defence".

The prediction was also based on the scenario that the US would be less willing to subsidise Europe's defence, and that Europe would eventually produce more of its own military equipment to reduce its reliance on America.

"In our view, the events of the last two weeks have turbo-charged this thesis," said analyst David Perry.

"In the last two weeks Denmark and the UK have announced significant increases in their defence budgets and Germany's new Chancellor has proposed a new €200bn 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, Perry said.

The analyst told investor to expect "significant increases" in consensus estimates and company guidance in the coming months and years.