Investors are piling into defence stocks as geopolitical tensions and the sector’s strong fundamentals boost performance.
Defence spending as a percentage of GDP has risen steadily in key economies over the past decade, with governments allocating larger budgets toward modernising military capabilities and acquiring advanced weapons systems. But the sector as a whole, especially in Europe, is looking at its biggest injection of new money since the end of the Cold War.
“The scale and pace of change cannot be overstated,” said Neil Wilson, an analyst with TipRanks. “We were looking at €200bn in additional spending a couple of weeks ago and now it’s closer to €1tn. Obviously, the challenge is in how the ECB deals with all of this.”
Three years, or perhaps 11 years, late and Europe is finally moving to a collective economic war footing. Meanwhile, the German DAX has shrugged off every bit of bad news to trade at a fresh all-time high. This follows the announcement that Germany is abandoning all fiscal restraint, and will no longer be the Eurozone’s frugal aunty, as it is set to borrow $860 billion to finance increased defence and infrastructure spending.
New data from GraniteShares, an issuer of Exchange Traded Products (ETPs), shows that investors who got in early are already being rewarded with excellent performance.
Total AUM in GraniteShares 3x Long Rolls-Royce Daily ETP (3LRR) and 3x Long BAE Daily ETP (3LBA) increased during February to nearly £80 million from £44 million and trading activity surged as investors reacted to British government plans to boost defence spending and the performance of the two companies.
The 3x Long Rolls-Royce Daily ETP (3LRR) achieved returns of 78.09% and 3x Long BAE Daily ETP (3LBA) delivered 40.36% last month.
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Rolls Royce looks well-positioned for European defence contracts
Rolls-Royce’s defence division secured a major win with the £9 billion Unity contract from the UK Ministry of Defence, reinforcing its role in key programmes such as the Typhoon jet engines and nuclear submarine reactors. Rolls-Royce LON:RR. is seeing strong performance in its civil aerospace market.
Manuj Sarpal, Chief Technology Officer at GraniteShares, said:
“Growing geopolitical tensions and uncertainty around the Trump administration’s NATO stance have driven European nations to boost defence spending, benefiting firms like Rolls-Royce and BAE Systems. Investor confidence in the defence sector is evident but beyond defence, Rolls-Royce is capitalizing on a recovering civil aerospace market, with large engine flying hours surpassing pre-pandemic levels at 102% by late 2024.”
Given the strong fundamentals and shifting geopolitical landscape, there could be further increases in investment in the defence sector in coming days.
“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 wealth manager Nigel Green, CEO of deVere Group.
“We believe that this is likely to be the beginning of a fundamental realignment that will shape markets for the foreseeable future. The shift is structural. 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. The market is already waking up to this reality, and those who act now stand to gain the most.
