The Defense Industry: A Turning Point Ahead?
For years, global disarmament has been a key focus on the international political agenda. However, geopolitical crises—particularly the conflict in Ukraine—have shifted the landscape and reignited demand for armaments. With the sobering realization of how fragile peace can be, calls for stronger defensive measures have increased. In response, several countries have announced investments in their defense industries and military capabilities to renew and modernize infrastructure that, in many cases, has become outdated.
NATO’s Role and the 2% Spending Target
The North Atlantic Treaty Organization (NATO) is one of the largest alliances of states in the world. For more than 80 years, NATO and the U.S. have played a crucial role in maintaining peace in Europe. However, since Russia’s invasion of Ukraine, the world has changed: peace has become more fragile and cannot be taken for granted. In addition, shifting political agendas and diverging national interests may cause some countries to reassess their security policies.
Even before taking office, U.S. President-elect Donald Trump urged NATO members to significantly increase their defense budgets. He has long criticized the failure of some countries to meet the so-called 2% target, accusing them of underinvesting in their defense infrastructure. This target, which requires each NATO member state to allocate 2% of its gross domestic product (GDP) to defense, was formally established at the 2014 NATO summit in Wales, influenced by Russia’s annexation of Crimea. The agreement also stipulated that countries not yet meeting the target should aim to do so within the next ten years.
While U.S. defense spending has consistently exceeded NATO’s benchmark, many European countries have fallen significantly short.
Increased Public Spending on the Defense Industry
Given the geopolitical fragmentation and ongoing international threats in various parts of the world, defense spending is expected to increase. In 2024, Europe’s defense industry recorded a 17% increase in revenue, according to the Aerospace, Security, and Defense Industries Association of Europe (ASD) This upward trend is likely to continue given the current geopolitical climate. Since Russia’s attack on Ukraine in February 2022, many NATO members have significantly increased their military expenditures. A recent NATO report highlights that in the current year, 23 out of 32 allies are expected to meet the 2% target this year. Germany’s military spending reached $61.1 billion in 2023, marking a 48% increase from 2022 and a 14% rise compared to pre-war levels. In 2024, for the first time, Germany’s defense budget is set to meet NATO’s target, with a calculated 2.12% of GDP—this was achieved partly thanks to a special €100 billion fund. However, in the coming years, the defense budget will need to increase significantly to sustain this level, keeping in mind that defense budget increases often take time to translate into operational impact.
Large Defense Companies in Europe
Amid increasing efforts to strengthen European defense and modernize military equipment, defense stocks have performed exceptionally well in recent years. SAAB, a leading Swedish company in aerospace, defense, and security, has tripled in value since Russia’s invasion of Ukraine. In addition, the general rise in defense spending within the European Union, recent developments in the President Trump´s trade war have led some of the U.S.’s trading partners to seek alternative suppliers for defense equipment.
SAAB offers an alternative to the U.S. F-35 fighter jet with its JAS Gripen, which may be of interest to both Portugal and Canada. However, SAAB is not the only major player in Europe, and competition remains fierce. While it is uncertain who will ultimately secure these potential orders, the growing interest in European alternatives highlights a broader shift that could continue to benefit the Europe´s defense sector. Nevertheless, some experts are raising concerns that SAAB’s valuation is becoming harder to justify than some of its competitors.
Another large defense company in Europe is Rheinmetall. Although it operates in the same industry as SAAB, Rheinmetall has a broader portfolio. It has been one of the biggest beneficiaries of increased defense spending, securing large orders from the German government. Moreover, Rheinmetall is actively participating in collaborations with other defense companies to create a dominant force in European land defense systems, focusing on the industrial development and commercialization of next-generation combat vehicles. These efforts solidify Rheinmetall’s role in Europe's defense landscape, highlighting the shift toward regional cooperation and self-sufficiency.
Ultimately, while investment in the defense industry is likely to extend beyond Russia’s invasion of Ukraine, and some companies stand to benefit, markets often overestimate growth potential and inflate valuations. While this may not apply to the entire sector, it remains a key consideration, potentially suggesting increased volatility ahead.
Risks
Credit risk of the issuer:
Investors in the products are exposed to the risk that the Issuer or the Guarantor may not be able to meet its obligations under the products. A total loss of the invested capital is possible. The products are not subject to any deposit protection.
Currency risk:
If the product currency differs from the currency of the underlying asset, the value of a product will also depend on the exchange rate between the respective currencies. As a result, the value of a product can fluctuate significantly.
Market risk:
The value of the products can fall significantly below the purchase price due to changes in market factors, especially if the value of the underlying asset falls. The products are not capital-protected
Product costs:
Product and possible financing costs reduce the value of the products.
Risk with leverage products:
Due to the leverage effect, there is an increased risk of loss (risk of total loss) with leverage products, e.g. Bull & Bear Certificates, Warrants and Mini Futures.