Since Trump came to power, his administration has spawned chaos throughout the world's political fabric.
Domestically, a raft of Executive Orders, actions by the Department of Government Efficiency (DOGE) under Elon Musk have resulted in turmoil and upheaval. For example, haphazardly firing of federal employees working on containing a bird flu outbreak and then rehiring them after learning of their mistake.
Volatile times
This week, the volatility has spread to Europe and Ukraine, as the US has moved to negotiate with Russia to end the Ukraine war but without the involvement of Europe or Ukraine. This has triggered alarm in European capitals. The President of France, Emmanuel Macron, organised an emergency summit of major European nations in Paris to discuss this development.
The ripples have spread into the financial markets. On 17 February, European defence stocks surged as investors anticipate increased spending by European nations. This has led major European defence stocks such as Rheinmetall, BAE, Saab, Thales and Leonardo to some stellar year-to-date returns
Source Financial Times Markets
The bond market is not immune as well, as European sovereign debt yield curves have steepened, as long term yields rise, an indication of potential increase in bond supply. The market is anticipating an increase in government borrowing.
Why is this happening?
The actions by the US, as well as messaging from officials such as Secretary of Defence Pete Hegseth, are underscoring the point that the Europeans can no longer depend on the US as a reliable partner in their defence.
This Financial Times article (paywall) highlights how much the Europeans depend on US support to fill in the gaps in their capabilities.
- Their logistics capabilities are not as developed as the US' and this is a not a new problem. Military operations are complex and often need huge logistics support. In 2013, the French had to depend on the US to transport their troops to Mali. They also had to depend on their refueling planes to keep their fighter jets airborne for that operation.
-US weapon platforms are better developed than the European options. The F-35 fighter jet depends on US ground-to-air weapons systems, the Chinook is the best heavy lift helicopter, according to Belgian Defence Minister Theo Franken
-European armies' plans and training are oriented towards depending on US support for war. Reworking that will take time and money
-The US has about 90,000 troops in Europe but it is unclear if they can be depended upon since there is now a possibility that they might be withdrawn. Numbers wise, European nations have more than enough troops but they may not be in a state fit for military operations.
-European defence industrial capacity is insufficient to supply and sustain wartime operations. Wars require sustained production of munitions and Europe doesn't seem to be able to do this, at least for the moment. The problem seems to be multi-faceted and complex. European defence companies are unwilling to invest in new capacity such as factories and production lines if there is no steady and long term contracts to justify these investments.
A long journey and more money needed
To be fair to the Europeans, they have made strides since the Russian invasion of Ukraine. The issues they have to grapple with are many and deep, stemming from a long period of peace. It is hard to reverse decades of under-investment in a few years.
Some analysts have pointed out that despite the progress they have made, European NATO members' defence spending has more room to grow. While countries like Germany and France are already spending 2% of GDP (the NATO target) on defence, some countries like Italy and Spain have more to do before reaching this level of spending.
There is some speculation that 2% might not be enough and 3% is a more realistic target. If this is the case, defence spending by the six largest European NATO countries might need to increase by EUR 156 billion, based on 2025 GDP estimates.
This potential spending is not academic. Europe has been in transition since the Russian invasion of Ukraine and with the latest developments from the US, the need to invest in defence is more urgent than ever.
As the possibility of a peace plan for Ukraine moves forwards, Europe is confronting new necessities such as the need to put troops on the ground in Ukraine or to loosen tough European spending rules to allow for greater defence spending, ideas which a few years ago seem ludicrous.
All this is driving the rise in European defence stocks as well.
Number go up
Investors who have been paying attention will note that this is not the first time defence stock prices have surged up in response to political upheavals. On 27 February 2022 (yes on a Sunday), Chancellor Olaf Scholz of Germany delivered his Zeitenwende "historic turning point" speech to the Bundestag (the German parliament), describing his plan to massively increase German defence spending.
The share price of Rheinmetall, the German arms manufacturer of the Leopard tank (also used by the Singapore Arms Forces), surged from the closing price of EUR 107 on 25 Feb to EUR 133 on 28 Feb, an increase of nearly 25% in one day.
Indeed, in a comparison of the price returns of a grab-bag of major European defence stocks against the US Magnificent 7, from 24 February 2022 (start of Russian Invasion) to 21 February 2025, the European stocks outperformed most of the Mag 7, with the exception of Meta and Nvidia.
Rheinmetall has trounced even Nvidia during that period.
A close look at Rheinmetall's revenue shows a marked improvement from 2022 onwards. Based on the latest company's guidance, they anticipate a revenue of 10 billion for 2024, almost double 2021 revenue.
LSEG data via Financial Times Markets
It looks like the road ahead for Europe is getting harder and their defence industry is in the midst of a secular change. The tailwinds driving the stocks upwards look set to continue, especially during the 2nd Trump admin.
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