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Pro Analysis

Buy defense stocks on rising tension: Credit Suisse

General Dynamics' submarine Ohio class
Source: General Dynamics
General Dynamics' submarine Ohio class

Investors should buy defense stocks due to the prospect of more global defense spending in the coming years, according to Credit Suisse.

"We believe that defense stocks embody a large number of our favorite themes and offer some hedge to the U.S. presidential election and increasing global political tensions," analyst Andrew Garthwaite wrote in a note to clients Monday. "We believe investors should be overweight defense stocks."

Garthwaite cited how European Union and U.S. defense spending is 18 percent and 10 percent below its 20-year historical norm as a percentage of GDP. Moreover, U.S. defense spending is near a 35-year low and many major European countries do not meet NATO's 2 percent of GDP defense spending requirement, according to the analyst.

In addition, the defense sector should do well if Donald Trump wins the U.S. presidency, he said. The Republican nominee said he would increase defense spending by 15 percent and would pressure NATO countries to spend more to meet their commitments.

"In our view, the defense sector faces only limited disruption from either Chinese competition or new technologies as the sector is heavily regulated and as a matter of national security protected from foreign competition, which creates large barriers to entry," Garthwaite wrote.

Here are three Credit Suisse outperform-rated defense stock ideas.