Trump stance will force NATO countries to spend more whether elected or not

Defence spending is rising, but is it enough?

Published Date: May 28th, 2024 | Author: Jake Coulson

Trump, Turmoil and NATO Threats

The current geopolitical landscape is turbulent, to say the least.

Russia is pressing ahead with its invasion of Ukraine, the largest conflict fought on European soil since the Second World War. Israel is pushing further into the Gaza strip in its pursuit of Hamas terrorists. Houthi rebels have been firing on ships in the Red Sea – one of the world’s busiest shipping routes. Meanwhile, the inauguration of Taiwan’s new president comes amid a near-daily showing of Chinese fighter jets and naval ships around the island.

In times of instability, and existential fear for some countries under threat from opportunistic neighbours, the NATO alliance has typically provided a degree of relief. One of its core tenets is that “if one NATO ally is attacked, then all NATO allies are attacked”. Aggressors might think twice about attacking a smaller nation, knowing that doing so could provoke the full might of NATO, which includes the most well-funded military on the planet.

Indeed, the United States (US) has long been the most powerful member of NATO, and by far its largest spending contributor. Much of the perceived security provided by NATO comes from the US, and the promise that they would cross the Atlantic to help fellow members in need.

But that security has been called into question. The US is facing a presidential election in November of this year, and many pundits have suggested the result is on a knife’s edge. The Republican party’s presumptive nominee is former president Donald Trump, who has been somewhat ambivalent on the country’s role in NATO, to put it lightly. The relationship between Trump and NATO has always been disjointed, with Trump demanding during his presidency that Europe do more to meet the 2%-of-GDP spending target.

 European NATO members are bolstering their defence capabilities and spending sums that are largely unprecedented since the Cold War.

Throughout his presidency, Trump threatened to leave NATO, believing it to be “obsolete”. He even went as far as to suggest that if a European NATO member came under attack, the US would not intervene.

The source of Trump’s anti-NATO sentiment seems to be driven by his belief that the US is carrying the alliance on its shoulders, while members in Europe underspend, safe in the knowledge that the US can protect them. NATO outlines a minimum 2%-of-GDP spending target for its members, but in 2023 only 11 out of the then 30 (armed) members were hitting the target.

As such, Trump controversially claimed that, for NATO members not meeting that spending target, he would “encourage” Russia to attack them. More recently, he stated he would push for the target to be raised to 3%.

Perhaps the threats are nothing more than inflammatory rhetoric; perhaps the threats are serious. Either way, it highlights a very real scenario for European NATO members – that the US may not always rush to their aid. Whether it is to appease the possible president-elect Trump, or to bolster a post-US NATO, European members are realising they will need to stand on their own two feet and spend more on defence.

European NATO members are stepping up

It would seem that some European NATO members have received the message loud and clear. United Kingdom (UK) Prime Minister Rishi Sunak vowed to boost UK defence spending to 2.5% of GDP by 2030, up from the current 2.3%. This is a significant increase beyond the 1.9% in 2022 and 2023, and means that the UK is currently exceeding NATO’s 2% target. The pledge was matched, dependent on “economic conditions”, by the country’s Labour government, which polls suggest will oust the Conservative Party in the General Election set to take place later in the year.

Defence expenditure as a share of GDP among select NATO members

Trump and NATO spending targets

Source: NATO; The Guardian. Est. figures from 2014 to 2023. For illustrative purposes only.

The effects of the spending increase have already been felt, with defence secretary Grant Shapps announcing the UK would get at least 25 new warships as a result. In his own words, “the golden era of shipbuilding is here”. Shapps also called on all NATO members to boost their defence spending to 2.5% of their GDP to meet the demands of a “more dangerous world”.

France, meanwhile, is on track to meet the 2% target this year, rather than in 2025 as previously forecast. Their defence budget for 2024 is €47.2 billion and expected to rise over the coming years. The news coincides with France surpassing Russia as the second largest arms exporter worldwide – taking an 11% share. It means for the first time in decades, two NATO members are leading global arms exports.

Perhaps most notable, however, is Poland. This year, it is spending an impressive 4% of its GDP on defence, ranking it approximately 8th worldwide by that metric – and that’s bearing in mind three of the countries ranking higher are actively at war (Russia, Ukraine, and Israel). Poland shares a 232km land border with Russia, and it would seem they are reluctant to rely on US aid alone to keep that border secure. Poland’s president, Andrzej Duda, argued during a visit to the US that NATO members should be spending 3% of their GDP on defence.

The three aforementioned countries are part of a wider trend among European NATO members. The alliance’s secretary general, Jens Stoltenberg, praised an “unprecedented rise” in defence spending. He also noted that 2024 would see European NATO members spend 2% of their combined GDP on defence.

So, in spite of (or perhaps due to) Trump’s words, European NATO members are bolstering their defence capabilities and spending sums that are largely unprecedented since the Cold War.


Defence expenditure in 2015 prices and as a % of GDP, NATO Europe

NATO Spending

The companies empowering European NATO members

Evidently, European NATO members are looking to spend big on defence. It is therefore unsurprising that several European-domiciled defence companies have seen significant growth in recent months.

Renk, known for supplying gearboxes for German tanks, debuted on the Frankfurt stock market in February and subsequently saw its shares jump by around 27%. The company’s CEO, Susanne Wiegand, told Reuters that “the attacks on Israel and the subsequent war in Gaza was a turning point and changed investor sentiment towards defence”.

Rheinmetall is another company at the centre of the European defence story. Up by around 75% year-to-date (YTD), the German tank maker has publicly recognised the criticality of defence spending. Rheinmetall’s CEO, Armin Papperger, said that Europe’s ammunition stocks are currently “empty” following the supply of munitions to Ukraine, and that restocking would take a “long time” – 10 years, to be precise. The company has pledged to invest over $300 million in a new arms manufacturing plant, that should allow for the production of 200,000 rounds of artillery shells per annum.

Meanwhile, British-domiciled BAE Systems is up by around 23% YTD. The company is currently nearing the completion of the sixth Astute-class nuclear-powered submarine of the UK’s Royal Navy, HMS Agamemnon. The minister for defence procurement, James Cartlidge, said the new submarine would “play a vital role in the defence of the nation”. More recently, the U.S. Navy chose BAE Systems to develop Dual Band Decoy (DBD), an advanced radio frequency countermeasure that shields fighter jets from enemy attacks.

In France, Thales is up around 24% YTD, boosted by the news that the Ministry of Defence would give them a £1.8 billion contract to maintain the Royal Navy fleet over the next 15 years.

More and more defence contracts are being issued in Europe. There has been something of a paradigm shift, with investors adjusting their ethical considerations in light of the geopolitical situation. As Rheinmetall CEO Armin Papperger told the Financial Times, “some months ago, people wanted to ban us, to say that this industry is a very bad industry…it’s a totally different world now”.

Indeed, it would seem that the world is changing. Defence spending is showing no signs of slowing down, and European NATO members are gearing up to protect themselves with or without US help. European defence companies, therefore, will be critical.

Past performance is not indicative of future performance.

Future of Defence UCITS ETF (NATO) aims to provide exposure to NATO and NATO+ ally defence and cyber defence spending. Companies must derive the majority of their revenues from the manufacture and development of military aircraft and/or defence equipment, or have operations in cyber security, contracted with a NATO or NATO+ allied country.


Thematic ETFs are exposed to a limited number of sectors and thus the investment will be concentrated and may experience high volatility.

Exchange rates can have a positive or negative effect on returns. The value of equities and equity-related securities can be affected by daily stock and currency market movements.

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