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The european defense industry has been marginal for decades as european defense spending was low. The new paradigm caused by geopolitical changes will lead to sustainable and predictable growth for the companies in this sector. Investors must not overlook the opportunities in this sector!
The European Union defense spending was about 1.9% of its GDP in 2024. This amounted to about EUR 326bn in spending. Considering a GDP of EUR 1'700bn and a target defense spending of 3.00% p.a., the defense spending should increase to about EUR 540bn p.a. or an increase of EUR 214bn p.a. as compared to the current situation.
One can consider that the EU will target at least 50% of those purchases from european companies, i.e. about an increment of about EUR 100bn in annual sales for european defense companies.
The sales of the top 14 defense companies in Europe were about EUR 200bn in 2024. Therefore, the defense companies in Europe could see at least a 50% increase in their sales based solely on the increase in defense spending by the european countries.
Considering that some countries are starting from a low base and will need a lot of catch-up (Spain, Italy, Germany, etc) and that the rearmament trend will also occur in other areas of the world one can come up easily with scenarios where the european defense sector will see a doubling of its revenues.
It is interesting to note that the world's largest sovereign wealth fund, the one of Norway, is not allowed to invest in stocks of defense companies. Many ESG investors also do not invest in such stocks. However, the changes in the geopolitical situation have led now some of the mainstream Norwegian politicians to seek a reversal of the ban on purchases of defense companies.
In conclusion, not only are stocks in defense companies going to benefit from a doubling of their revenues in the near term, they are also going to benefit from investor money flows.