UBS analysts have claimed that markets are failing to account for an expected jump in defence expenditure by European nations despite the recent surge in the value of weapons companies, such as BAE.
In an analyst note, UBS analysts upgraded BAE’s stock price target from 1,600p to 2,450p and European weapons dealers Saab and Thales to Buy.
“Investors are currently pricing in 2.5 per cent GDP spent on defence in 2030 with the European defence players likely to take market share from US primes,” said the analysts.
However, UBS forecast that defence spending would reach 2.8 per cent of European GDP by 2030 and increase to as high as 3.3 per cent in the years after.
“This may prove conservative. During the cold war European NATO members spent three to six per cent of GDP on defence, and the investments required in this cycle are likely to be higher,” noted the analysts.
The analysts also modelled defence spending reaching as high as 3.5 per cent of European GDP, which could happen if the US accelerates the rate at which it withdraws its military support from Europe.
UBS also removed a 1.75 per cent penalty on the weapons manufacturer shares that had been suffering from ESG risks, “reflecting changing investor perceptions of the sector”.
European nations have pledged to hike their military budgets amid warnings from Donald Trump that the continent needs to step up military support for Ukraine ahead of a planned peace deal with Russia.
The UBS analysts pointed to a recent whitepaper from the European Union, which called for greater defence spending in European businesses as a key indicator of the shift.
“The United States, traditionally a strong ally, is clear that it believes it is over-committed in Europe and needs to rebalance, reducing its historical role as a primary security guarantor,” the whitepaper said.
Meanwhile, comments from the arms industry, such as European missile maker MBDA over more orders coming from Europe, have further reinforced the view that a greater share of domestic expenditure is likely.
BAE and defence stocks
The analysts upgraded their price targets for several defence companies on the back of higher forecast weapons spending, including hiking the target price of BAE.
”We continue to view BAE as the highest quality defence company in the space,” said the UBS analysts.
“It has the most diversified product suite and geographical diversification with a solidified yet growing presence in the end markets that we expect to benefit well from the defence macro theme.”
Over the last few months, BAE has failed to match the record surges in stock price seen by other European defence companies, but is still up 17 per cent in the last year.
UBS credited the firm’s underperformance to its 45 per cent exposure to the US, but said that despite uncertainty about reform in the US Department of Defence, the market was over-pricing the risk.
“We believe sentiment on US defence is beginning to turn and Trump’s 2026 budget request in the next few weeks or months could be another positive catalyst,” they added.