Invest in Europe's defence renaissanceMany said it could not be done and would never happen. But the European defence industry is undergoing a paradigm shift. The geopolitical landscape has shifted dramatically, and delayed action is no longer an option. With rising global instability and the return of President Trump to the White House, European leaders must act decisively to ensure security, strategic autonomy, and industrial resilience in defence. This is not just a short-term response—it marks the beginning of a multi-year investment cycle poised to benefit European defence industries over their US counterparts.
A game-changer: The European Defence Industrial Strategy
For decades, Europe has relied too heavily on US defence capabilities, leaving its defence industry fragmented and dependent on non-EU (European Union) suppliers. However, with uncertainty surrounding US military commitments, European nations are fast-tracking plans to build a stronger, more self-reliant defence industry that can meet the security challenges of today and the future.
The European Defence Industrial Strategy (EDIS) is Europe’s most ambitious attempt yet to transform its defence capabilities1. The strategy aims to unify and strengthen Europe’s defence sector by prioritising joint procurement, innovation, and collaboration among member states.
The urgent measures driving this transformation include:
Rebuilding European defence manufacturing: by 2030, at least 50% of EU defence procurement must come from European manufacturers, rising to 60% by 2035. This is essential to reduce reliance on non-EU suppliers, particularly the US.
Enhancing intra-European defence trade: the EU is aiming to boost defence trade within the bloc to 35% of the total defence market value, fostering a stronger, more integrated industrial base.
Collaborative procurement surge: currently, only 18% of EU defence equipment is procured jointly. By 2030, this must rise to 40%, ensuring lower costs, better interoperability, and a more resilient supply chain.
Redirecting defence budgets toward Europe: governments are being pushed to shift their defence spending away from external actors (like the US) and toward European manufacturers, mitigating risks associated with foreign dependency.
Incentives to accelerate investment: the EU is exploring joint procurement tax incentives and VAT waivers to encourage faster and larger-scale European defence collaborations.
These measures collectively aim to build a more self-reliant and resilient European defence industry while reducing dependency on non-EU suppliers.
Policy-driven capital allocation towards European defence companies
While the US defence industry has been a strong performer in the past, European defence stocks are now positioned for superior long-term growth due to this sustained investment cycle and structural policy shift. The US defence budget is already near record highs, limiting future upside for stocks. Not to mention, DOGE2 is looking to cut costs with defence spending increasingly targeted. In contrast, Europe is at the start of a multi-year rearmament cycle, with significant upside for European contractors. European defence firms are experiencing record-high order books, ensuring stable, long-term revenue growth. Rheinmetall posted a 1.8x book-to-bill3, on top of its 1.7x ratio in 2023, reflecting robust demand for its portfolio of munitions and combat vehicles4. Saab's order intake totalled 79.2 bn krona, or a book-to-bill of 1.8x, with international customers accounting for 80%2. In comparison, order activity for US defence contractors is less heated but still healthy, averaging 1.2x5.
The shift in European defence spending is not temporary—it is structural. With Europe entering a multi-year defence upcycle, investors have a rare opportunity to participate in one of the most significant industrial transformations of our time, but the choice of investment vehicle will be critical for unlocking that potential.
Sources:
1 European Commission: Joint communication to the European Parliament, the Council as of August 2024.
2 Department of Government Efficiency.
3 Book-to-bill is a key metric used in the defence and manufacturing industries to measure the strength of incoming orders relative to completed sales.
4&5 Company Filings, WisdomTree, Bloomberg as of 31 December 2024.
6 WisdomTree, FactSet as of 28 February 2025.
7 P/E = price-to-earnings.
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