European Defence Stocks Soar as Military Spending Surges Amid Global Tensions

Defence stocks across Europe are experiencing an unprecedented boom as geopolitical tensions and increased military spending drive investor confidence to new heights. The sector’s remarkable transformation is perfectly exemplified by Babcock’s journey from crisis to triumph.

Five years ago, Babcock was plagued by profit warnings and delayed results, making it a prime target for short-sellers. Today, the defence and engineering giant has made a triumphant return to the FTSE 100, with its shares climbing 13% following a £200m buyback announcement and elevated profit projections.

The catalyst for this dramatic shift stems from mounting global conflicts and Donald Trump’s stance on NATO support. European governments are rapidly increasing defence budgets, with the European Commission proposing “ReArm Europe,” an ambitious £682bn spending initiative. This surge follows decades of reduced military expenditure post-Cold War, where defence spending plummeted from 2.3% to 1.3% of GDP.

Major defence contractors are reaping the benefits of this renewed focus on military capability. Rheinmetall, manufacturer of Germany’s Panther battle tank, has seen its shares soar by 250% over the past year. Similarly, BAE Systems and Airbus have experienced substantial growth, contributing to a 57% rise in the FTSE All-Share Aerospace and Defence index.

The sector’s renaissance has also challenged traditional ESG investment principles, with some funds, like Allianz, revising their policies to accommodate defence investments. European nations are increasingly prioritising sovereign capabilities to reduce dependence on US equipment, creating opportunities for local manufacturers and technology providers.

As global tensions persist and European nations scramble to modernise their military capabilities, the defence sector’s robust performance shows no signs of slowing. This military renaissance represents not just a financial opportunity but a fundamental shift in Europe’s approach to defence and security.