“For the past 50 years, Europe has relied on the United States for security, assuming unwavering support. However, the realization that this is no longer guaranteed will take time to fully set in, and the transition will not be seamless,” Sabourin says. “Achieving self-sufficiency in European defence would require an additional €250 billion in annual spending. European governments have signalled a commitment to increasing defence budgets, bolstering investor confidence in EU defence firms, which are expected to benefit from this surge in military expenditures.”
The US’ apparent withdrawal of support for Ukraine has accelerated this trend. With the news of a proposed ceasefire, there is a chance that the tempo of this trend changes somewhat. Nevertheless, the wider commitment to European security self-sufficiency appears to be in place.
Sabourin outlines that investors and advisors who want to play in this space have a number of available avenues. The most obvious is in first-order weapons manufacturing stocks. Companies like Rheinmetall that produce the weapons and material that will be in demand through these spending increases. He notes, though, that while European defence names have performed well, US defence names have stagnated or even fallen. Sabourin explains that the US Department of Defense has committed to significant budget reductions, which means cancelling or not renewing contracts with major US defence companies.
Second-order strategies could involve investments in more diversified industrial names with some defence business. Those include aerospace names like Boeing and Airbus, as well as logistics and infrastructure investments as countries in Europe look for ways to more rapidly move troops and material.
The third-order investment strategy, Sabourin explains, revolves largely around technology. Certain tech names like Palantir are directly exposed to global defence trends, and we’ve seen how the data analytics company has seen its stock value rise in part due to its use in conflict zones like Gaza. Other large tech names like Microsoft have involvement in the defence sector and can offer some clients exposure to this trend without the ethical concerns that can come with direct investment in a weapon’s manufacturer.
