Bankinter | The Prime Minister (Keir Starmer) announced that he will increase defence spending to 2.5% of GDP by 2027 with the ‘ambition’ of raising it to 3% by 2029 (vs. the current 2.3%). According to Starmer, the increased defence spending will not be financed by tax rises or increased debt, but rather by cutting ‘expenditure on overseas development’.
Opinion of the Bankinter analysis team: Good news for the defence sector that confirms our positive view of the sector. Although the increase in spending as a proportion of GDP is not exponential, it shows that NATO countries and Europe in particular have to be prepared for the threat from Russia and the arrival of the Trump administration.
Currently, there are many countries that do not even meet the current target of 2%, including Spain and Italy, among others.
Despite the sharp rises in the sector so far this year, valuation multiples are reasonable considering expected EPS growth rates. As a reference: Rheinmetall P/E26e 22.4x, Leonardo 18.3x, Thales 17.5x, Indra 9.7x and EPS growth (CAGR 24/26): Rheinmetall +44.6%, Leonardo +8.6%, Thales +12.3% and Indra +11.5%. Given the scarcity of investment vehicles for maintaining direct exposure to the sector, we recommend doing so via shares, more specifically through our defence thematic portfolio, which includes our favourite stocks in the sector.
