Defence stocks fired up by European security spending hopes

On Tuesday, France's pledge to breach deficit reduction rules by boosting security spending to defeat ISIS, was backed by the European Commission.

The country also invoked the European Union's mutual defense clause that calls on all member states to provide “mutual aid and assistance”.

Analysts at Citi said in a note to clients that: “We expect extra spending on policing, private security and military intervention.”

Joshua Mahony at IG added: “The fiscal boost of expansion of defence spending is likely to be something that will play out across Europe as the war against ISIS intensifies. The downing of a Russian plane over Egypt by ISIS-linked terrorists only goes to expand the idea that military spending will rise globally over time."

Following rises for US aerospace and defense companies overnight, French defence group Thales enjoyed a 3.2% rise on Tuesaday and aircraft maker Dassault climbed 2.4%.

Rolls-Royce, whose engines are used in fighter jets and submarines, jumped 4.6% to 552p by mid-afternoon, while BAE Systems, maker of various military air and land vehicles and also a specialist in cyber security, was 2.3% higher at 475.2p.

Cobham, which makes electronic warfare equipment and critical parts for jets and helicopter, had risen 2.4% to 282.23p, while Meggitt, a designer of combat systems and combat training systems via its Defense Systems arm, advanced 1.9% to 381.1p.

Qinetiq, the technology group spun out of the Ministry of Defence, was up 1.4% and Senior, which has an aerospace arm that provides plastic applications used in defence applications, climbed 1.8%.

Worries about airport security were also heightened as Moscow confirmed the downing of Russia's Metrojet flight 9268 over Egypt was due to a bomb. Smiths Group, whose diverse engineering capabilities include making X-ray detection machines, was one of the biggest risers on Tuesday, surged 9% to 1,009p, helped by a robust trading update.

Christoph Riniker, head of equity strategy at Julius Baer, advised against investing in government bonds in core eurozone markets and maintained his 'overweight' on French equities.

He said while uncertainty and higher volatility is expected in the coming weeks, comparable terror attacks in history show that the impact on equity markets has been rather short-lived.

"The latest developments after the terror attacks in Paris will strengthen the political support for ECB actions in order to extend its balance sheet further at its upcoming meeting on 3 December. However, we advise against investing in government bonds in core eurozone markets at this stage, due to the low absolute yield levels.

"In terms of equity market exposure we have recently upgraded French equities to 'overweight'. From a fundamental perspective the reasoning for this remains unchanged. As outlined above there will be short-term uncertainty but we remain confident that in the medium term the market will do well. We therefore leave the rating unchanged."