On the podcast in this episode, host Stuart Fieldhouse chats with Aneeka Gupta, Director of Macroeconomic Research at WisdomTree about the health of the European Defence sector and how governmental spending is impacting on defence stocks.
Here’s the podcast which you can find on all major podcast platforms. If you enjoy it, we’d appreciate it if you would like and subscribe to our channel.
Show notes:
00:00 What exactly is the Defence sector?
02:04 Do European defence companies especially benefit from Trump’s ‘America First’
05:24 Are current valuations justified?
08:35 Are there overlooked companies in the European defence sector?
10:24 Are US defence stocks the likely losers?
12:58 ESG and Defence
15:08 Cybersecurity companies now sit within the Defence sector
16:31 The Asia-Pacific defence sector
Related ETFs
Europe Defence Defence
LON:WDEF / EUR 
Podcast Transcript
Stuart Fieldhouse:
Welcome back to the Investing Markets and Money podcast. And this week, we’re talking about the defense sector. Obviously, an area that is of enormous interest at the moment. Certainly, we’ve seen defense stocks in Europe being bid up to, much higher levels than previously. A lot of focus on this area both politically and economically.
Joining us on the podcast today, we have Aneeka Gupta, who is part of the equities team. She’s actually an equity strategist at fund manager WisdomTree, who regular readers of our website will know have recently launched an ETF focused on the defense sector, which has been doing very well, and has raised over half a billion dollars in assets under management, in a very short period of time. Welcome to the podcast, Aneeka.
Aneeka Gupta:
Thank you so much, Stuart. It’s a pleasure to join you, and, you know, discuss our outlook on the defense sector.
Stuart Fieldhouse:
Obviously, you guys have been quite focused on this area having recently launched a product into the market. But it can be quite a nebulous sector for fund managers and investors to properly get to grips with. Can you give us your definition from WisdomTree as to what constitutes companies in the defense sector?
Aneeka Gupta:
The way we look at it at Wisdom Tree is the defense sector encompasses industries involved in the production of military equipment, technology, and services that are essential to national security. So that would include aerospace companies, manufacturers of military aircrafts, drones and related technologies, security firms, the providers of physical security solutions, surveillance systems, protective services, and then cybersecurity companies, so specialists in protecting digital infrastructure from cyber threats, you know, which is increasingly vital in today’s modern defense strategies.
Stuart Fieldhouse:
The European defense sector in particular has been boosted by, the Trump administration’s decision to reemphasize the fact that Europe has to stand on its own two legs, that defense budgets need to be increased. And there are big questions about whether or not, or to what degree The US will continue to underwrite European security. Has this boosted the European defense sector in particular when you look at it from a global perspective? Is it is has it been European companies that have been enjoying the most from this recent, boom?
Aneeka Gupta:
Yes, I would definitely say so. You know, Trump’s return to the White House clearly has compounded Europe’s problems. Trump has been very consistent, in his stance on European nations spending more on the defense borders, be it in the eighties, be it in 2016 when he first came to power, and even in 2025. He has consistently mentioned that European nations need to spend more on their defense. And now his administration’s emphasis on America First policies and also calls for NATO allies to increase their defense spending has prompted European nations to now reassess their security strategies.
So that’s leading to increased defense budgets. European countries are now boosting their military expenditure to enhance that self reliance, and we’re also seeing investment in domestic defense industries. So that’s really aimed at reducing that dependence on foreign military equipment and fostering innovation on the ground. For many European nations, the prospect of a US brokered peace deal without Ukraine’s involvement was deeply concerning, in fact, with Washington earlier in this year, signaling a shift towards having direct negotiations with Russia and potentially sidelining European interests. That just built up the urgency for a more unified and self sufficient European defense architecture.
And and the need for that has has really never been greater. So, they say that sometimes, for decades, nothing happens. And sometimes in weeks, you have a full decade’s worth of activity taking place. And I think the sequence of events we’ve seen in the first quarter of 2025 really do summarize that in a nutshell with Trump trying to broker a peace deal, Europe understanding the urgency of the matter and scaling up its spending on defense, introducing carve outs, within national budgets for defense spending, Germany, under the leadership of chancellor in waiting Frederic Mertz powering ahead with a spending bill for defense and infrastructure before the new, parliament takes hold just gives us a glimpse of the urgency with which Europe is taking on its multiyear rearmament strategy.
Stuart Fieldhouse:
And we’ve seen a big boost in the share prices of European defense companies, particularly the big ones. Do you think the current valuations are justified, or or have they actually moved more up into bubble territory as a consequence of the reaction?
Aneeka Gupta:
Well, you’re absolutely right. You know, given the urgency with which Europe is responding, then it is quite clear that defense companies have benefited. You know, we’ve seen a rerating of multiples. We’ve seen the price performance appreciate considerably over the prior six months. However, for us, we still believe there are certain aspects that are still not being priced in into the current valuations.
Take for example, a very interesting forward looking metric, which is the book to bill ratio. The book to bill ratio is a key metric that essentially is comparing incoming orders to completed sales. And that averaged about 1.4 times in 2024, up from 1.1 back in 2022. So this essentially is indicating that new orders are outpacing deliveries, and that’s setting the stage for some very strong revenue growth over the coming years. If you take, for example, Raim Patel’s book to bill ratio, that stands at about 1.8 times, and that again demonstrates a significant surplus of orders over current existing sales. So I think these aspects do tell us that there is a strong pipeline of revenue that is likely to come in for these European defense companies.
The other key factor is the nature of the defense sector. So the defense sector operates on very long term contracts, and that means earnings expansion takes a bit of time to actually materialize. So as those older backlogs convert into revenue and we in lockstep see that profitability scale up over the next few years, we will see earnings growth, expected to drive those PE ratios down naturally, and that is not in the price right now.
So if you look at, for example, in our underlying portfolio, by 2026 and 2027, we are seeing higher earnings already being forecasted. So valuation multiples should become a lot more attractive as we move on ahead. We’ve seen a strong, performance of late, but there are several catalysts still not in the price. We even have an important NATO summit coming up in June and we’ve already seen a number of European defense companies put forward a scenario analysis of the likelihood of NATO’s two percent current guideline for defense spending as a percentage of GDP to actually rise further, and that could go up to two and a half, 3%, or even 3.5%.
Now if that does come to fruition and does materialize, we will, in lockstep, see much higher spending on European defense take place.
Stuart Fieldhouse:
I’m looking at my own stock screens, in the defense sector. There have been some companies I’ve seen that that haven’t responded to this surge in buying and potentially flying under the radar with some investors right now. Do you, from your perspective, see areas of underinvestment within the European defense sector?
Aneeka Gupta:
Yes. You know, while we were analyzing the defense sector, we did look at a very interesting analysis that was done by the European Defense Agency. And in their analysis, what they had put forward is that during times of peace, Europe has essentially under invested in its core products. So if you think of it, the core products in a nutshell are really, really simple. It’s a simple three pronged pyramid structure.
The first being, replenishing stockpiles including arms and ammunition, replenishing, cold war era legacy systems that is also currently used by the EU Armed Forces, and the third is, restoring the multilayer air and defense missile system. So these are the three areas that Europe has typically underinvested in because they’ve just taken a very, easy stance during times of peace. And so as this investment starts to reflow, and come back into the European defense sector, we believe at the initial onset of this multiyear investment cycle, these three sectors will start to see the biggest intake of this investment coming in.
Stuart Fieldhouse:
Obviously, the potential losers here are The US defense stocks, partly because Trump has been talking about possibly cutting back The US defense budget. But also, from my perspective, I was wondering whether they might actually start to lose out on some international contracts, particularly in the European market we’ve just been speaking about. What’s your take on The US defense sector right now?
Aneeka Gupta:
Yeah. I definitely would agree with that. European nations are now taking an approach where the US is looked upon as an unreliable ally. And as they take on that outlook, European nations are now seeking autonomy. So their long standing alliances and technological collaborations mean that US companies might still secure those contracts in areas where they are offering unmatched expertise or advanced technology. However, given that push for local procurement, that is likely to lead to a much more competitive landscape because European efforts are now aimed at strengthening their own domestic defense capabilities, and that’s going to have a big impact on the US defense contractors’ role in the overseas markets.
In addition, with the implementation of DOGE by the by the current US administration, they are also looking to cut back on military spending. In fact, if we look at the share of federal expenditures, we’re now starting to see the share of federal expenditure on national defense begin to decline and other areas are beginning to take a bigger proportion of total federal expenditures. So areas such as entitlement, social security spending, and even interest on debt now with US treasuries up to thirty years yielding north of 4%, the share of interest, as a percentage of total federal expenditures has risen to 11%.
So I think that’s another very important consequence of the US reducing its expenditure on military spending and at the same time, Europe wanting to gain greater autonomy on its own defense capability is likely to have a big impact on the the revenue generation ability of US defense stocks.
Stuart Fieldhouse:
One thing I wanted to ask you about was ESG criteria because traditionally, a lot of fund managers have screened defense companies out of their portfolios because they don’t fit established ESG criteria. Do you anticipate there could be a shift here now, by some institutional investors as the allocators who who might no longer see defense stocks, as violating those those sorts of criteria? Now I’m thinking here more along the lines of the fact that some of these companies are now contributing to the sort of security and independence of the European Union, NATO, etcetera, rather than their track record in selling arms to countries outside Europe for more dubious reasons.
Aneeka Gupta:
You’re absolutely right. The inclusion of defense stocks in ESG focused portfolios has been very contentious. Traditionally, we would see defense companies faced a lot of exclusions due to their association with conflicts. However, now we’re starting to see evolving geopolitical realities, prompting a reassessment of what should be classified as ESG or now what rules should be relaxed allowing more defense companies to come under the realm of ESG focused portfolios.
So, in terms of the reassessment, we’re looking at policy shifts. So some asset managers have either relaxed their exclusions when owing to the fact that they are recognizing the rule of defense in maintaining security. And at the same time, there’s this ongoing debate where discussions continue on balancing ethical considerations with the necessity of defense investments. So that has resulted in a very strong reassessment. So we are seeing a number of investors who typically would hold back on defense as a sector now starting to, take it into consideration.
Stuart Fieldhouse:
And outside of your traditional, defense companies, what’s your view on cybersecurity companies? Do those fit into a defense portfolio? Technically, a lot of those used to sit in the tech sector, for example. But should we be seeing cybersecurity now as as part of the defense allocation from investors?
Aneeka Gupta:
Absolutely. So cybersecurity is definitely becoming integral to the national defense strategies, and that’s primarily because we’re now seeing an increasing rise in the number of cyber threats. So increasing frequency and sophistication of cyberattacks on critical infrastructure is resulting in a greater focus on being able to protect the infrastructure against these rising cyber threats. We’re also seeing military operations’ growing reliance on digital systems necessitating robust cyber defenses.
So I think as we progress, into the future with a greater adoption of technology, investments in cybersecurity firms are expected to grow and that’s going to be as a result of nations really prioritizing digital resilience.
Stuart Fieldhouse:
And I also, finally, just want to ask you. We’ve spoken about The US defense sector, we’ve spoken about the European defense sector. The Asia Pacific defense sector was, prior to all this, seen as one area of quite substantial growth. Is that still the case? And also, is that an easy sector to allocate to?
Aneeka Gupta:
So it’s a very important sector because the Asia Pacific region is also witnessing increased defense spending. And that’s really being driven by regional tensions as well as economic growth. So we’re seeing local companies are the ones that are actually benefiting and that’s because governments are investing in upgrading their equipment, their current military arm modernizing their current armed forces and their capabilities. Governments are also developing indigenous technologies, so they’re encouraging a lot more self reliance and they’re also reducing their dependence on foreign suppliers.
So I think this trend will clearly present opportunities for regional defense firms to expand and innovate. If you think about it, back in 2024, Lloyd Austin, who was the secretary of defense, actually made a statement that the US’s biggest challenge is the People’s Republic Of China. And if they solve the problem of the People’s Republic Of China, they will be able to deal with all the other threats, be it from Iran, be it Russia, Ukraine threats, be it other, terrorist attacks. For them, their sequence of priority has China right at the top.
And so given the the tensions between China and Taiwan, we still believe that the defense sector within the Asia Pacific market will also have a tremendous amount of growth, in 2025 and and going forward as well.
Stuart Fieldhouse:
Fantastic. Well, thank you thank you very much indeed for coming on the podcast and and telling us about what’s been going on in this sector. I think it’s certainly one that’s going to see a lot more growth, unfortunately, in some respects, over the over the rest of the year. Thanks very much indeed for your time, Aneeka!
