Share prices in European defence companies have skyrocketed as investors anticipate a significant surge in military spending. The UK and France are spearheading a diplomatic effort to establish a peace deal for Ukraine, intensifying expectations of heightened defence budgets across Europe.
Britain’s BAE Systems saw a remarkable 17% jump in early trading on Monday, while Germany’s Rheinmetall gained 14%, France’s Thales surged 16%, and Italy’s Leonardo advanced by 10%. This rally extends a sustained surge in defence stocks as market confidence grows over expanded European military investment. Fears that the US may retract its security commitments have only fuelled this momentum.
Former US President Donald Trump has unsettled allies worldwide, asserting that Ukraine is not “ready for peace” three years into Russia’s full-scale invasion. His threats to withdraw American support for Ukraine have exacerbated geopolitical concerns, particularly after his contentious meeting with Ukrainian President Volodymyr Zelenskyy.
UK Prime Minister Keir Starmer underscored the gravity of the situation, declaring Europe to be “at a crossroads in history” as he hosted a high-stakes summit in London. The gathering, attended by Zelenskyy, French President Emmanuel Macron, and 18 other leaders, sought to craft a strategic peace initiative for Ukraine. European defence executives, long advocating for increased military expenditure, are now witnessing policymakers shift their stance under mounting security pressures.
The bullish sentiment extended to aerospace companies with substantial defence divisions. Airbus climbed 3% in Monday’s trading, France’s Safran gained 2.7%, and Rolls-Royce continued its strong performance with a 6% surge, marking a record high. British defence technology firm QinetiQ advanced by 8%, while France’s Dassault Aviation soared 14%.
BAE Systems, Britain’s largest weapons manufacturer, has reaped the benefits of soaring demand, reporting record orders last month. The company’s annual profits exceeded £3 billion for the first time in 2024, and its stock has more than doubled since the onset of the Ukraine war, propelling its market valuation to £48 billion.
Holger Schmieding, chief economist at Berenberg investment bank, asserted that “Europe, particularly Germany, must and likely will increase defence spending well beyond current plans.” The UK and Norway have already pledged additional aid to Ukraine, with Germany expected to follow suit. Starmer reinforced Britain’s commitment last week, accelerating the timeline to raise defence spending to 2.5% of GDP by 2027—three years ahead of schedule. This expansion will be financed through contentious cuts to international aid.
Macron has urged European nations to boost defence budgets beyond 3% of GDP to counter the ongoing Russian threat. In Germany, Friedrich Merz, the likely new chancellor, is engaged in talks to implement higher defence allocations.
Analysts at JPMorgan highlighted that recent developments have “turbocharged” the narrative of a European rearmament cycle. With NATO consisting of 30 European member states, many are now expected to ramp up military production and reduce reliance on US imports. As the landscape of global security evolves, European defence firms stand poised to benefit from the shift in strategy, making them increasingly attractive to investors.
Fidelity European Trust PLC (LON:FEV) aims to be the cornerstone long-term investment of choice for those seeking European exposure across market cycles.
