The pan-European Stoxx Europe 600 Index gained 1.1 per cent on Monday, with many defence companies posting double-digit increases.
Shares of Germany’s Hensoldt added 22.3 per cent, while Rheinmetall AG surged some 14 per cent, Saab AB rallied 12 per cent, and BAE Systems Plc jumped 15 per cent.
The market rally followed a key announcement by UK Prime Minister Keir Starmer, who, after meeting with Ukrainian President Volodymyr Zelensky, confirmed that Britain would join forces with France and other allies to “stop the fighting” in Ukraine.
Starmer’s remarks carried extra weight in the wake of Zelensky’s tense exchange with US President Donald Trump, which led to the Ukrainian leader’s abrupt departure from the White House, and a subsequent confirmation on Monday that the US will be pausing military aid to Ukraine.
"Through my discussions over recent days, we've agreed that the UK, France and others will work with Ukraine on a plan to stop the fighting. Then we'll discuss that plan with the United States and take it forward together," Starmer said, adding that a number of countries have indicated they want to be part of the plan to “guarantee peace”.
As part of the plan, European leaders agreed to ramp up defence spending to demonstrate to Trump that Europe is capable of defending itself.
Commenting on the weekend, Ursula von der Leyen, president of the European Commission, said: "After a long time of underinvestment, it is now of utmost importance to step up the defence investment for a prolonged period of time.
"Member states need more fiscal space to do a surge in defence spending."
Market commentators view these events as the start of a fundamental realignment that could shape markets for years to come.
“With European leaders scrambling to reinforce their military capabilities after the US distanced itself from security commitments, defence companies stand to be major beneficiaries,” said deVere Group’s CEO, Nigel Green.
He described the shift as structural, noting that governments across Europe are coming to terms with the fact that their decades-long reliance on US military backing can no longer be taken for granted.
“The Trump administration’s refusal to provide clear security guarantees has made it clear that Europe must shoulder more of the burden itself. This will translate into significant, sustained increases in defence budgets,” Green said.
“The market is already waking up to this reality, and those who act now stand to gain the most.”
Green highlighted that the investment case for defence stocks is more than an immediate conflict-driven surge, referring to it as a “long-term megatrend”.
“Defence companies are at the forefront of innovation, from cyber capabilities to next-generation weapons systems, artificial intelligence-driven surveillance, and hypersonic missiles,” he said.
“Their order books are expanding, their government contracts are becoming more robust, and their role in national security strategies is becoming increasingly indispensable.”
Institutional investors are also expected to take notice of this growth, with defence increasingly seen as a hedge against consumer-driven market volatility, according to the CEO.
AMP’s Shane Oliver admitted that the surge in European defence stocks over recent days could indicate the sector may just reinvigorate Europe.
Referring to a recent statement made by the leader of the recently elected Conservatives in Germany, Friedrich Merz, who laid out plans to add US$210 billion to Germany’s special defence fund, the chief economist told InvestorDaily that money will likely stay in Europe.
“That’s the way they’re going. They’re going to spend more on defence and a lot of that money, given what is happening with the US, I’m sure they’ll allocate it to European defence contractors as opposed to US defence contractors,” Oliver said.
Australia needs to follow suit
As for what a breakdown in the Western alliance means for Australia, Oliver said with the US becoming more isolationist under Trump, “Australia will have to continue to ramp up its defence spending”, potentially boosting it to 3 per cent of the GDP and fast.
“Good for defence industries. Not so good for the ‘peace dividend’ that helped global growth and shares in the post-Cold War period,” Oliver said, adding that Australia will have to follow in Europe’s footsteps.
“We’ll have to rely more on ourselves and potentially work more closely with Europe.”
In the 2023-24 financial year, Australia’s defence budget exceeded $50 billion for the first time, totalling $52.59 billion. Additionally, the government has committed to increase defence funding to approximately $100 billion a year by 2033-34, or 2.4 per cent of Australia's GDP.
Recognising the investment potential in defence, VanEck last year launched its Global Defence ETF (DFND), Australia’s first defence-focused exchange-traded fund, on the ASX.
Speaking to InvestorDaily in October, Jamie Hannah, deputy head - investments and capital markets at VanEck, said DFND has already sparked strong interest among investors looking to tap into the under-represented defence sector.
“DFND was launched in response to market demand, and it has received highly positive feedback from investors and the broader investment community,” Hannah said.
“The world has changed from countries celebrating the peace dividend, a term used to describe the economic benefits of a decrease in defence spending. Instead, countries are increasing military expenditure. Maintaining security and defence is an enduring focus for governments globally,” he added at the time.
Australia currently boasts three defence ETFs, with Global X launching its Defence Tech ETF (ASX: DTEC) to Australian shores in late September, followed by Betashares with its own iteration, the Global Defence ETF (ASX: ARMR), a couple of weeks later.
