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The FTSE 100 leading share index is surging again after a couple of tough months. Given the cheapness of British blue-chip shares and changing investor priorities, I think there’s scope for further significant gains.
Following what it described as “challenging market conditions of February and March“, Peel Hunt said that the backdrop has been more positive since April, “with the Trump administration agreeing a number of trade deals, including with the UK, and with interest rates having been cut by the Bank of England“.
More specifically, the investment bank said that “we are seeing a rotation out of US assets into Europe and greater institutional positivity towards the UK“.
This might not be a surprise for long-term observers of the London stock market. It isn’t for me. The UK is home to a wealth of quality shares that are trading below their true value. With fears of eroding US exceptionalism creeping in, and worries over the hefty valuations of Stateside stocks rising, I think the switch towards British stocks could continue.
A FTSE bargain
But which UK shares could rise strongly from current levels? Babcock International (LSE:BAB) is one that, in my opinion, remains hugely undervalued despite a 108%-plus share price rise in 2025.
At £10.52 per share, the FTSE 100 business trades on a price-to-earnings (P/E) ratio of 20.3 times based on current estimates.
This might not look like anything to shout about at first glance. It’s approaching double the broader Footsie average of around 11 times.
But in the context of the broader defence industry this represents good value in my book. To put Babcock’s P/E into context, the WisdomTree Europe Defence ETF — which comprises 24 different large- and mid-cap companies — carries a reading of 31.4 times.
Investing in individual shares is more risky than buying an exchange-traded fund (ETF) that spreads investors’ cash out. One particular disadvantage is that Babcock sources most (around 75%) of revenues from the UK, making it less geographically diversified than an ETF like WisdomTree’s.
Yet I believe the cheapness of Babcock’s shares more than offsets this handicap. What’s more, the outlook for UK defence spending is on a clear upward trajectory — last week, the government pledged to raise arms expenditure to 2.6% of GDP by 2027, making it one of NATO’s most prolific spenders.
A stock for these times
Unfortunately, the world is becoming more dangerous, as the conflict that erupted between Israel and Iran last week demonstrated. In this climate, global defence budgets (which rose at the fastest pace since 1988 last year, according to the Stockholm International Peace Research Institute, or SIPRI), should continue rising sharply.
With its broad range of engineering, support, and training services, Babcock is in a strong position to grow sales in this landscape. Revenues and underlying operating profit here soared 11% and 17%, respectively, in the last financial year (to March 2025).
Defence shares aren’t for everyone, given the obvious ethical considerations. But on the flip side, some investors believe these companies provide a vital service in protecting the country’s national interests. For the latter group, I think this FTSE 100 share is worth serious consideration today.
