BAE and defence peers surge as Ukraine talks herald ‘new era’ for European spending

BAE Systems PLC (LSE:BA.) shares jumped over 6% on Monday as defence stocks rallied on talk around hiked security spending in Europe on efforts to end the Russia-Ukraine war.

Crisis talks were set to be held among European leaders in Paris on Monday, before a meeting between US and Russian officials in Saudi Arabia, at which Europe and Ukraine would not be represented.

Following comments from the new Trump administration that Europe should bear more responsibility for its own security, Monday’s talks also came after UK prime minister Starmer had signalled troops could be deployed to Ukraine under a peace deal.

Citi analysts noted the turn prompted the need for higher defence spending, but also “a greater willingness to invest in European” firms.

JPMorgan echoed the view, adding: “We are in a completely new era for European defence spending.”

US unwillingness to continue subsidising European defence coincided with a worsening geopolitical environment and followed around 30 years of underinvestment, analysts said.

Stepping up spending

Starmer said the country is "facing a generational challenge when it comes to national security".

As he headed off to the emergency leaders' meeting in Paris, the British PM said: "We need to step up in terms of our collective response in Europe. And by that, I mean capability, by that I mean playing our full part when it comes to the defence of the sovereignty of Ukraine if there's a peace agreement."

Earlier, writing in the Telegraph, he said, the UK must be "ready and willing to contribute to security guarantees to Ukraine by putting our own troops on the ground if necessary".

There were also suggestions from NATO general secretary Mark Rutte that members would have to boost defence spending to “‘considerably more than 3%” of GDP.

These comments from Rutte, said AJ Bell’s Russ Mould, acted as another share price catalyst for defence stocks on Monday, even though markets had already priced in a stronger earnings environment for the sector in recent days.

"That Donald Trump is keen for European allies to spend as much as 5% of GDP on defence adds to the narrative supporting the sector.”

Share price moves

BAE shares were up 6.7% at 1,310p on Monday, while European peers Leonardo, Thales and Rheinmetall added 5.7%, 5.6% and 9.1% respectively.

Back in London, FTSE 250-listed countermeasures maker Chemring Group (LSE:CHG) surged 6.2% and QinetiQ Group PLC (LSE:QQ.) 4.4%, while the likes of Rolls-Royce Holdings PLC (LSE:RR.), Babcock International PLC (LSE:BAB) and Melrose Industries PLC (LSE:MRO, OTC:MLSPF) also gained.

Other UK-listed defence-related stocks, including helmet and gasmask maker Avon Technologies PLC (LSE:AVON) and component maker Senior PLC (LSE:SNR) gained 0.8% and 1.2%.