JPM still bullish on both European Civil Aerospace and Defence

Investing.com -- J.P. Morgan analysts maintained a positive stance on European Civil Aerospace (ECA) and Defence (EDS) sectors, citing strong year-to-date performance and robust medium-term growth prospects. 

“We retain a positive stance on both sub-sectors,” the analysts said, noting that in 2025 the ECA sector has outperformed local markets by 22%, while the EDS has outperformed by 96%.

In civil aerospace, J.P. Morgan said the sector is entering a period of “normal growth” for air travel and aftermarket sales, which analysts described as “still a very attractive proposition.” 

While some investors have expressed caution as growth rates moderate, J.P. Morgan argued that these concerns are misplaced. 

“Global airline capacity is now growing around 4% year-on-year, closer to the ‘normal’ rate seen pre-COVID,” the brokerage said, adding that engine aftermarket growth is expected to stabilize at 8-10% annually from 2026 through 2029, with volume up roughly 4% per year and price growth of 4-6% per year. 

Analysts noted these rates follow a post-pandemic surge of 15-25% in 2022-24 and reflect normalization rather than slowdown.

The sector is also benefiting from a “harvesting phase,” where no major new aircraft or engine programs are in development, allowing companies to capitalize on prior product investment. 

However, J.P. Morgan flagged a currency headwind, “However, in 2025 YTD the $ has depreciated by 8% against the £ and by 14% against the €. If current spot and forward FX rates remain then the $ is now a small headwind for most of the ECA companies we cover.”

In defence, Germany is singled out as a strong growth story, with the national defence budget projected to grow at a mid-teens CAGR through 2030. 

J.P. Morgan said Hensoldt and RENK are expected to grow in line with the budget, while Rheinmetall could outperform via organic investment in electronics and digitization, multiple new joint ventures in missiles, satellites, and drones, and acquisitions including Iveco military trucks and naval shipbuilding. 

Analysts project all three companies will achieve a 2024-30 EPS CAGR of around 30%, with EBITA margins expanding through operational leverage and improved efficiency.

The UK defence sector also has several major orders in the pipeline. BAE Systems could sell up to 40 Eurofighter jets to Turkey, valued at roughly £5 billion, while Norway plans to acquire at least five Type 26 frigates, valued at over £5 billion. 

Babcock expects two Type 31 frigate orders from Denmark and Sweden, each around £2 billion, and the UK government announced plans to purchase 1,500 armoured personnel carriers, valued between £1.5 billion and £2 billion.

France also sees significant upcoming contracts. Denmark plans to spend $9 billion on long- and medium-range air defence systems, including the SAMP/T NG produced by Thales and MBDA, potentially worth €1 billion for Thales with first deliveries in 2027. 

India is reportedly moving closer to ordering a third batch of Rafale jets, potentially 114 units valued over €20 billion, with Thales and Safran each capturing about 20% of the economic value of each jet.

J.P. Morgan identified German Defence, Babcock, and Rolls-Royce as top 12-month picks, and flagged MTU Aero, Rolls-Royce, and Leonardo as capable of exceeding consensus earnings forecasts in the second half of 2025, placing them on Positive Catalyst Watch.