LIVE MARKETS-All eyes on NATO summit for defence stocks

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ALL EYES ON NATO SUMMIT FOR DEFENCE STOCKS

NATO members have agreed to an increase in their defence spending target to 5% of GDP ahead of this week's summit in the Hague, but Citi believes this may be "as good as it gets" for some companies in the sector.

As expected by Citi, the group has agreed to boost core defence spending from 2% to 3.5% of GDP and spend an extra 1.5% of GDP on related security spend.

"We believe there is little chance of upside to these targets, but some downside risk," Citi says.

The bank has taken the axe to RENK R3NK.DE, Hensoldt HAGG.DE and Saab SAABb.ST, downgrading the three stocks to "sell" as they believe current share prices are pricing in materially more profit growth than they expect is likely.

The three companies are up 260%, 160% and 105% this year, respectively.

Europe's precarious fiscal picture is another factor behind the downgrade.

France and the UK are already running large fiscal deficits and net debt is close to or above 100% of GDP. The two countries make up about a third of Europe's NATO budget according to Citi.

And while Germany and Sweden, the homes of the three downgraded companies, are in pretty good shape to increase debt sufficiently, Citi believes Europe's other NATO members may struggle, and they account for 20-25% of sales for these companies.

"Given the fiscal constraints in many of the large spending European countries, increasing debt sufficiently may not be feasible," writes Citi.

(Samuel Indyk)

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