It has been a pretty dire week for geopolitics. Ukraine’s defeat seems to edge ever closer as Trump cuts ties with America’s former ally, halting all military aid to the country invaded by Putin’s Russia just over three years ago.
As the US withdraws more and more from the global stage, European countries are realising it is up to them to take responsibility for their own security. The age of Europe relying on US-backed defence guarantees is coming to an end, necessitating massive rearmament. The armed forces of countries such as the UK, France, and Germany, which have been underfunded for decades, suddenly need to increase their capabilities on a massive scale.
In the UK, Keir Starmer has pledged to increase defence spending to 2.5% of GDP by 2027, with an ambition to further increase this to 3% by the end of the next Parliament, with most of the money being taken from the foreign aid budget. Similarly, in Germany, incoming chancellor Friedrich Merz plans to reform the country’s constitutional ‘debt brake’ to increase defence spending by up to €100 billion. Across Europe, President of the European Commission Ursula von der Leyen has unveiled plans to borrow €150 billion to fund a major rearmament push.
What does all this mean? The defence industry is about to see a huge increase in orders. A rally in UK defence stocks helped propel the FTSE 100 to a record high close on Monday. Rolls Royce, a major UK defence player, upgraded mid-term profit targets. It has seen a 111% increase in share price in the last year alone, and Bank of America and Deutsche Bank have reiterated “buy” ratings on the stock in recent weeks.
It's a similar story with BAE Systems, the UK’s largest defence company and one of the largest in the world. Share price reached a record high this week at £16.64 per share on Monday. The company plays an important role in military aircraft production, helping to produce the Eurofighter Typhoon and the American F-35. BAE has reported a record backlog of orders of £77.8 billion, up 11% from last year.
This rally in defence stocks is not confined to just the UK. Rheinmetall, a large defence player in Germany, saw record high share prices of €1,199 on Monday, up 82% year-to-date. The company produces several tanks and armoured fighting vehicles used by armed forces around the world.
The pattern can be seen in many other defence contractors across the Western world and is likely to continue as geopolitical tensions, unfortunately, continue to rise.
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