Citi says these stocks could be exposed to a rise in European defense spending

Investing.com - European plans to scale up military spending "with unprecedented urgency in modern times" are tipped to lead to a "small" boost in Eurozone growth in 2025, analysts at Citi have argued, adding that several defense sector names could be exposed to the uptick in expenditures.

Worries in the region have swirled around whether the U.S. under President Donald Trump will be a willing provider of a longstanding defense backstop. Fresh U.S. negotiations with Russia over ending the war in Ukraine have also exacerbated concerns in the European Union that a ceasefire may not include security guarantees that help prevent future aggression by Moscow.

Against this backdrop, leaders on the continent have recently ratcheted up talks around increasing defense budgets.

This week, EU Commission President Ursula von der Leyen announced a 150-billion euro loan instrument that aims to help member states fund military spending. She has also proposed excluding new defense expenditures from the bloc’s fiscal rules, a move that would allow EU countries to shell out up to 650 billion euros on defense over the next four years without incuring extra budgetary penalties.

Meanwhile, German parties currently in talks to form a coalition government have agreed on a deal to loosen the country’s strict borrowing limits. The move to ease Germany’s so-called debt brake also came with a deal to create a new 500 billion-euro fund aimed at bolstering infrastructure and defense spending in Europe’s largest economy.

In a note to clients, the Citi analysts led by Beata Manthey said that, should the anticipated rise in military expenditures go ahead, activity in the Eurozone currency area might see a "very small" boost. Growth would be then bolstered by 0.2 percentage points in 2026 and 0.5 to 0.7 percentage points in the 2028-2029, the analysts said.

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Embedding these improved economic growth outcomes in their earnings models, the analysts added that the compound annual growth rate for income per share in the pan-European Stoxx 600 index would amount to roughly 11% through 2029. That would be about 2 percentage points higher than current consensus forecasts.

Although they flagged lingering near-term risks from Trump’s potential tariffs on EU goods, the analysts noted that "structurally higher defense spend could propel further European outperformance from here."

Several European defense stocks, which have surged recently on wagers for increased regional military spending, could be exposed to rising expenditures on kit like missiles, artillery munitions and armored vehicles, the Citi analysts said. They highlighted a range of firms in the sector, including BAE Systems (LON:BAES), Rheinmetall (ETR:RHMG), Thales (EPA:TCFP), Leonardo, Hensoldt, Airbus, and Dassault Aviation.

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