Following Donald Trump’s presidential victory last week, European defence stocks have been among the top gainers.
During the election week alone, Germany’s Rheinmetall and the UK’s BAE Systems saw gains of over 16 per cent and 10 per cent, respectively.
According to Cameron Gleeson, senior investment strategist at Betashares, Trump’s election victory is promising for European defence stocks, particularly given the Republicans’ call for members of the North Atlantic Treaty Organisation (NATO) to increase their defence spend.
During his first term, Trump pressured European NATO members to invest beyond 2 per cent of GDP on defence and reduce reliance on the US.
According to a recent report by the International Institute for Strategic Studies, European countries have boosted their defence budgets, especially following events like Russia’s invasion of Ukraine. In fact, 23 of the 32 NATO members are expected to meet or exceed the 2 per cent target in 2024, compared to just three in 2014.
However, according to Trump himself “2 per cent is the steal of the century”, and he expects European NATO members to “go up to 3 per cent”.
Speaking to InvestorDaily, Gleeson noted that, during his election campaign, the President-elect acknowledged that the US would help European nations against a future attack by Russia if they meet this spending guideline.
“Companies within the European defence sector reacted positively following Trump’s election victory,” Gleeson said.
“Global defence spending is a structural investment opportunity that is here to stay and has only been accelerating since Russia’s invasion of Ukraine.”
As countries embrace the strategic priorities of their national governments, and geopolitical tensions continue to build in the Middle East, Gleeson highlighted that defence stocks, such as those held by Betashares’ own ARMR, may remain well supported.
Jamie Hannah, VanEck’s deputy head of investments and capital markets, agreed that European countries have dialled up on their defence spending, but noted that this has come from a “low base”.
“Since the Cold War ended more than thirty years ago, the region has significantly underinvested in military capabilities,” Hannah told InvestorDaily.
“NATO members agreed in 2014 to commit 2 per cent of GDP to defence, but most European allies were slow to increase spending until the last few years.”
Now, the prospect of larger military budgets in the EU, according to him, is positive for defence stocks broadly, but European companies in particular stand to benefit from new policy designed to keep most of this spending within EU borders.
“Since the Ukraine conflict, nearly 80 per cent of the EU’s defence spending has been on foreign produced goods. To combat this, the European Commission has put forward a defence industrial strategy that proposes member states fill at least 50 per cent of defence procurements with locally-produced goods by 2030 and 60 per cent by 2035,” Hannah explained.
Notwithstanding the President-elect's remarks on withdrawing support from Ukraine and taxing foreign imports, Hannah believes EU defence stocks will continue to benefit from the US’ outsized military budget under the new administration.
“Major EU vendors such as Thales, Leonardo Spa and Saab have been providing highly specialised technologies, equipment and support services to US military institutions for decades, and often have a monopoly on particular niches and areas of specialty. These government contracts are not easily filled by other vendors,” Hannah concluded.
In a recent market outlook from VanEck, the firm also pointed to new research which forecasts elevated global defence spending in the years ahead.
Namely, Citi Research’s paper - Money and Might - Financing the Future of Defense - concludes that defence stocks appear attractively priced, as investors appear to be pricing in 0-3 per cent annual growth into most companies indefinitely.
“European countries are now reassessing their capabilities and reinforcing the need for a much stronger European Defense Industrial base, with their spending moving to higher levels,” Citi wrote.
Australia goes on the offensive
Australia recently saw the introduction of three global defence ETFs, with all three so far showing significant growth.
One of these was brought to the market by VanEck, with Hannah telling InvestorDaily last month that DFND has received highly positive feedback from investors and the broader investment community.
“Since DFND’s inception, it has returned 10.55 per cent to 24 October 2024. It has traded every day and currently has $12.2 million in assets and has averaged circa $371,000 daily since inception to yesterday,” he said on 28 October.
At the time, Hannah highlighted the increased global focus on defence spending, citing ongoing geopolitical tensions that have prompted governments around the world to ramp up military expenditures.
“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 said.
“Defence expenditures are typically mandated and ongoing geopolitics has created an environment of increased spending.”
The Australian federal government’s National Defence Strategy, released in 2024, outlines a long-term plan to raise defence spending to 2.4 per cent of GDP by 2033–34, equating to around $100 billion.
“Much of the budget is being directed toward existing companies that are leaders in their fields. These companies operate in diverse sub-industries including aerospace and defence, and electronic equipment and instruments,” Hannah said.
“Given the current geopolitical climate, governments will need to continue to invest in this sector.”
