Buy EU defense stocks amid latest Ukraine war developments: Morgan Stanley

Investing.com -- European defense stocks are emerging as a strong investment opportunity amid the latest developments in the Ukraine war, according to analysts at Morgan Stanley (NYSE:MS).

With geopolitical tensions intensifying and European governments committing to increased military spending, the financial institution has reiterated its bullish outlook on the sector, identifying key players such as Rheinmetall (ETR:RHMG), Leonardo, and BAE Systems (LON:BAES) as favored stocks.

The latest Munich Security Conference underscored Europe's growing urgency to bolster its defense capabilities and reduce reliance on the United States.

Discussions at the conference revealed that NATO members are contemplating raising defense spending targets beyond 3% of GDP, a move that could provide a substantial boost to the European defense industry.

Morgan Stanley analysts believe these policy shifts will create sustained demand for military equipment and services, benefiting companies at the forefront of Europe's defense sector.

The urgency to scale up European defense production has been driven by concerns over the potential for reduced U.S. support for Ukraine and broader European security.

The speech by the U.S. Vice President J.D. Vance at the conference notably omitted direct references to the Russia-Ukraine conflict, reinforcing concerns that the U.S. may shift its priorities.

This dynamic is pushing European governments to take greater responsibility for their defense infrastructure, leading to increased orders for military hardware, including artillery, air defense systems, and armored vehicles.

Morgan Stanley analysts noted that the commitment to collective European defense is translating into tangible financial commitments.

Discussions at the conference highlighted calls for streamlining joint procurement, establishing a European army, and expanding security guarantees.

The brokerage expects these initiatives to drive demand for advanced weaponry, surveillance systems, and ammunition production, supporting the long-term growth of European defense firms.

Among the beneficiaries of this shifting landscape, Rheinmetall remains a top pick for Morgan Stanley, given its position as a key supplier of armored vehicles and ammunition.

The German defense company has seen strong order inflows from the government and is expected to capitalize on increased European military spending.

Leonardo, the Italian aerospace and defense group, is another favored stock, particularly due to its exposure to both European and NATO defense projects.

BAE Systems, one of the largest defense contractors in Europe, is also highlighted as a strong performer, benefiting from the U.K.'s ongoing commitment to military modernization.

While the sector is likely to see short-term volatility due to geopolitical uncertainties, Morgan Stanley maintains that the underlying industry fundamentals remain strong.

The push for higher defense budgets, coupled with strategic shifts in European security policies, provides a compelling case for investing in European defense stocks.

This article first appeared in Investing.com