(Bloomberg) -- European defense stocks could benefit from U.K. Chancellor Rishi Sunak’s spring budget on Wednesday as the war in Ukraine puts the spotlight on military spending, according to Citigroup Inc. analysts.
Sunak is likely to announce a “relatively modest” increase in defense spending, in line with inflation, after security became a priority for British voters following Russia’s invasion of Ukraine last month, analysts Charles Armitage and Samuel Burgess wrote in a note Tuesday.
“The public desire for the government to take some sort of action will register very clearly,” the analysts said. “With the Labour Party also calling for a rise in defense spending, the government is unlikely to want to look weak on this issue.”
However, with the Chancellor attempting to manage an escalating cost-of-living crisis, significant changes will likely not be announced until the Autumn budget, Citi said. “Sunak may feel that, irrespective of the political capital defense increases may generate for the government, it will soon be eroded if inflation gets out of control.”
Among companies, QinetiQ Group Plc and BAE Systems (OTC:BAESF) Plc would likely be the biggest beneficiaries of a U.K. defense spending uplift, while Italy’s Leonardo SpA (LON:0ONG) and France’s Thales (PA:TCFP) also have exposure, Citi said. Defense shares have outperformed the broader market this year, with the MSCI Europe Aerospace and Defense Index gaining 0.7% versus a more than 6% decline for the Stoxx Europe 600.
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