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Defense spending has long been a large part of Europe, and the provision of equipment, software, and services to support it is a separate listed sector. If you are looking at investing in European military stocks, understand this is a mainstream listed investment area, not a niche one.
Its structure is interesting. Defense stocks aren’t like consumer or tech stocks. Their revenues are intimately related to government contracts, procurement cycles, and politics around government defense spending. That detail will dictate how these stocks move, how you will assess them, and what risks you will take as an investor.
According to the Stockholm International Peace Research Institute, European defense spending has grown significantly over recent years in line with policy changes in European NATO states. This has led to fresh interest from investors in the industry, whose investment characteristics remain unchanged in spite of recent events.
Quick Answer
- European defense stocks are equities of European companies in the defense equipment, aerospace, cybersecurity, and military technology sectors.
- Sub-sectors include land systems, naval, aerospace, and logistics.
- Investors can get exposure through individual equities or Defense ETFs.
- Risks of investing include legislative and budget changes, geopolitical difficulties, and ESG exclusions.
- Many European military businesses are listed on the main European exchanges and are available to international investors.
- Unlike other industries, it is not driven by customer demand, but by government contracts.
What Are European Defense Stocks?
European defense stocks are publicly traded enterprises that create, produce, or provide equipment, technology, and services to European defense and security organizations.
Defense stocks include a varied range of companies, from big aircraft and weapons makers to niche tech suppliers, cybersecurity firms, logistics providers, and governments and military. They’re united by their main source of business: serving government and defense ministries, rather than the public.
These companies are traded on major European exchanges and follow all the usual corporate and market regulations; they are available to investors through normal brokerage firms. They’re not off limits in terms of access, but they do require a bit of special knowledge, given their different business model from the rest of the market.
You need to modify the toolkit you would use to analyze a consumer goods company or a technology business for a company whose major customer is a government defense department.
What Does the European Defense Sector Include?
The European defense sector comprises several sub-sectors, with differing products, markets, and business models.
- Land systems cover battle tanks, artillery, and other ground combat equipment, often through long-term procurement contracts with national armies and other military alliances.
- Naval includes warships, submarines, and other naval equipment. Naval contracts are very long-term, spanning decades and involving government planning and national shipbuilding strategies.
- Aerospace covers defense aircraft, drones, and associated parts and components. This sub-sector can involve both military and civil aerospace within the same firm, which can affect the “defense” component of a stock’s exposure.
- Cybersecurity has emerged as an important focus for the defense sector, providing secure communications, intelligence gathering, and cyber defense for the government. This is a more rapidly evolving and technology-focused sub-sector, with different growth drivers from the “traditional” equipment manufacturers.
- Support and logistics involve maintenance, training, and operational support required by the military. These companies may offer more stable cash flows than big equipment manufacturers, so they represent a different type of risk (and return) within the sector.
Knowing which sub-segments you’re exposed to (either through individual companies or a fund) allows you to judge the true risk/return profile of a stock or a fund investment in the defense sector before investing.
How Can You Invest in European Defense Stocks?
There are two main methods of investing in European defense stocks: individual shares and defense-focused exchange-traded funds (ETFs), which have distinct characteristics.
Individual Defense Stocks
Investors can gain exposure to individual European defense companies through CFDs offered by brokers that provide access to European equity markets. Most major European defense companies are listed on major European exchanges, and eligible traders may speculate on their price movements through platforms that offer the relevant market exposure.
Example: An investor wishes to invest in mainland European defense companies. They have access to the major European stock exchanges. They select the sub-segment they’re interested in (aerospace vs. cybersecurity), search for listed firms in that sub-segment, analyze their financials and contract backlog, and buy shares in the same way they would any other listed equity.
There are specific considerations for the defense sector, but otherwise, the process is the same as any equity purchase.
The factors to consider when getting exposure to individual defense stocks through CFDs are the company’s contract pipeline, concentration of customers, and dependence on its revenue on a select few contracts. A company that gets the bulk of its revenue from one country’s defense contract differs from one that has contracts spread out over different NATO member nations.
Defense-Focused ETFs
A defense-focused exchange-traded fund (ETF) is a fund that invests in a portfolio of shares of defense-focused companies, offering the opportunity to gain sector exposure with a single investment.
Like all shares, these funds are traded on exchanges and can be bought and sold in real-time during market hours.
The cost of diversification is that you will have exposure to a range of companies and sub-segments and will not be as affected by the performance of any one company. The trade-off is the inability to focus on particular companies or sub-segments you’ve researched and have views on. I
If you want sector exposure but don’t wish to conduct research on individual companies, a defense ETF is probably a better place to start.
What Are the Risks of Investing in Defense Stocks?
There are risks associated with investing in the defense sector that differ from investing in the consumer sector or the technology sector; make sure you’re aware of them before you invest.
Policy and budget dependence is the first. Defense sector revenues are largely at the mercy of government funding. Thus, a change in government, a change in priorities, a change in budget allocations can have a direct impact on contract volumes, regardless of a company’s operating or competitive strengths.
Procurement cycle timing introduces revenue unpredictability. Large contracts are awarded, postponed, or canceled in response to political and budgetary processes that can take years to play out. This affects short-term revenues regardless of a long-term order backlog.
Geopolitical dependency means defense stocks can be sensitive to international relations in ways other sectors aren’t. Changes in geopolitical alliances, arms exports, and sanctions can all impact a European defense company’s business, especially those with substantial international revenues.
ESG exclusion is an increasing and real factor. ESG-focused funds specifically exclude defense companies, and this can reduce the market for those companies in some circumstances and impact their valuations relative to other sectors that are ESG-eligible.
How is the Defense Sector Investing Different from Other Industries?
Investing in defense differs from investing in other industries, and that makes a difference in how you value, risk, and return on investment.
In most industries, you are selling to homes and businesses whose expenditures are a function of consumer demand and competition. Defense companies serve governments, whose purchases are determined by policy, treaties, and security assessments. The usual methods of gauging demand, consumer confidence, market share gains, and pricing power are not as relevant.
Government contracts can be long-lasting and stable, providing established defense companies with more certain cash flows than their commercial counterparts. That’s one reason why it is sometimes regarded as a recession-proof industry. Recessions typically reduce consumer spending; that’s less likely to affect defense budgets.
The flip side is political risk. Dependence on government contracts means dependence on governments. The governing party, foreign policy, level of NATO commitment, and bilateral arms trade agreements can all have impacts on a defense company’s operations in ways that are very difficult to predict. And that requires a different approach than consumer trends or prices charged by competitors.
FAQs
Yes, most European defense manufacturers are listed, and you can access them via a brokerage account with access to European exchanges.
Yes, if you have a broker who can access European markets. There is a currency risk when purchasing shares in stocks that are denominated in a different currency from your own; your return on the stock will depend on the exchange rate as well as the underlying stock’s return.
A defense ETF represents a collection of shares in several defense companies and is listed on a stock exchange, just like a share.
It’s up to the investor. Some ESG funds will avoid investing in defense stocks; others consider it a worthy and socially necessary business. No one answer fits all investors; it’s a matter of personal values.
Budget increases support higher contract volumes and revenue growth. Budget cuts or reallocations reduce order flow and can affect financial performance directly, making government spending decisions one of the most important variables to monitor in this sector.
The process of buying shares is no different from buying other shares. The analysis of the sector (procurement cycle, contract pipeline, political risk) is more complex. Investing in a defense ETF is the first step in that direction.
Final Thoughts
How to invest in European defense stocks is a question of access and understanding, in that order.
Access is straightforward. European defense firms are listed and accessible via traditional brokerage accounts and available through defense-focused ETFs. Investing is done like any other stock investment.
Understanding requires more work. Defense companies operate in a world of government policy, procurement cycles, and geopolitics uncommon to other industries. You need to know them before you decide on the level of involvement and the best way to get there to be a sector investor rather than just a theme investor.
Risk Disclaimer
This is an educational and not an investment advice resource. There are risks associated with investing in defense stocks or any equity sector, including the risk of losing money. So, be sure to consider your individual circumstances and consult a financial advisor prior to investing.
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