Investment themes that aim to capture the future of defence
The world is changing. The era of relative peace ushered in at the end of the Cold War saw many NATO members reduce their defence spending, but that era has seemingly come to an end.
Now, with geopolitical threats rising around the globe, countries are increasing their defence budgets. 23 of the 32 NATO members are spending 2% (or more) of GDP on defence, which is the alliance’s target, but there is now a growing realisation that this is not enough.
Meanwhile, European NATO members have been shocked by the US threatening to withdraw from the alliance. Underspending by European NATO members is no longer being tolerated, and the continent must now rearm to ensure its security.
Global defence spending is increasing
With the outbreak of numerous conflicts, and rising tensions across the globe, countries are increasing their defence budgets – defence companies are poised to benefit.
Focusing on defence companies domiciled in NATO countries can reduce risk
Focusing on NATO and NATO+ ally member states limits the risk of exposure to defence companies operating in countries that could one day be adversaries to the alliance.
European rearmament
European NATO members are undergoing a significant transformation, as they look to rearm for a world without the guarantee of US security.
Key risks:
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Rheinmetall, a German-based defence contractor, has been at the forefront of modernising NATO militaries and addressing critical gaps in European defence capabilities. Renowned for its expertise in armoured vehicles, artillery systems, and munitions, Rheinmetall has seen a surge in demand due to increased NATO defence spending following Russia’s invasion of Ukraine.
Addressing geopolitical tensions
Rheinmetall has capitalised on European NATO members’ push to meet or exceed the 2% GDP defence spending target. With many NATO countries seeking to modernise their land forces, Rheinmetall’s offerings, including the Leopard 2 tank upgrades and the Lynx armoured vehicle, have been in high demand.
Strong order book
In 2024, Rheinmetall reported a record order backlog exceeding €35 billion, driven by significant defence contracts from Germany, Poland, and other NATO countries.
Shell production capacity
With Russia’s war in Ukraine driving unprecedented demand, Rheinmetall has emerged as a key supplier to ensure NATO allies maintain operational readiness. By 2025, the company aims to produce up to 700,000 rounds of artillery ammunition annually.
BAE Systems, headquartered in the United Kingdom, is one of the largest defence contractors globally and a critical supplier for NATO’s defence infrastructure. With a portfolio spanning air, sea, land, and cyber domains, BAE Systems has been instrumental in enabling NATO members to enhance their defence capabilities.
Significant contributions to air defence
BAE Systems manufactures key components of the Eurofighter Typhoon and the F-35 LightningII, both essential to NATO’s air superiority. The company also provides advanced radar and electronic warfare systems to support NATO operations.
AUKUS submarine programme
BAE Systems is leading the design and development of the UK’s SSN-AUKUS submarines as part of the AUKUS security pact between Australia, the UK, and the US. The contract shows BAE’s position as a leader in advanced naval engineering and highlights its critical role in countering rising tensions in the Indo-Pacific.
Cyber and electronic warfare
Beyond traditional defence, BAE Systems has emerged as a leader in cybersecurity, helping NATO and allied countries safeguard critical infrastructure from growing cyber threats.
For illustrative purposes only.
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