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Investing.com - NATO’s decision this week to increase its defense spending target should bode well for defense stocks, according to analysts at RBC Capital Markets.
In a note, the analysts said, with the focus now on how European member states in the alliance will lift their domestic spending to 5% of GDP by 2035, Air France, Safran (EPA:SAF) and Lockheed Martin (NYSE:LMT) stand to be major beneficiaries of the uptick.
"While the 5% goal will be broadly beneficial across our coverage, we highlight Airbus (~23% revenue defense/space) and Safran (~20% revenue defense/space) given their greater exposure to European defense compared to U.S. firms, which we believe has strong growth opportunity off of today’s spending levels, as well as Lockheed Martin, which derives ~11% of revenue from Europe," the strategists argued.
Following a short summit on Wednesday, NATO signed off on the increased defense spending goal.
The 32 members of the North Atlantic Treaty Organization also reiterated their shared commitment to shield each other, saying in a brief statement that "an attack on one is an attack on all" -- the central stipulation of the all-important Article Five of NATO’s founding treaty.
U.S. President Donald Trump had initially sparked fears over the U.S.’s backing of Article Five when he told reporters before the summit that the section had "numerous definitions."
Yet Trump assuaged some of the worries when he said the U.S. is with NATO members "all the way."
Despite facing longstanding complaints from Trump over perceived low spending compared to Washington and an over-reliance on the U.S., as well as worries over possible security risks posed by Russia following its invasion of Ukraine, reports say NATO’s agreement nearly collapsed due largely to objections from Spain.
Still, all NATO members backed a statement establishing the 5% target, which was divided into 3.5% of GDP spent over the next decade on core defense like troops and a further 1.5% on defense-related sectors and infrastructure. Spain declared it does not need to meet the target and can live up to its commitments by spending less, adding that it does not anticipate its stance to have any repercussions.
NATO Secretary General Mark Rutte, who had lobbied for the elevated spending levels as part of a bid to ensure Trump’s support prior to the summit, acknowledged that it would likely not be easy for European countries and Canada to meet these targets. But he argued that it was crucial they do so "given this threat from the Russians, given the international security situation."