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Asian and European defense companies are witnessing impressive performance, surpassing their U.S. competitors in the market.
A notable sentiment from the 2008 animated series “Star Wars: The Clone Wars” states, “Wars are not won with superior weapons, but with superior strategy.” This quote strikes a chord as current market dynamics suggest a shift towards investing in military hardware, particularly from non-U.S. manufacturers.
In the wake of the Trump administration’s disruptions to traditional global alliances, nations intensified their defense budgets, leading to an uptick in defense stocks. While increased defense spending often benefits various arms manufacturers, stocks from European and Asian firms have shown exceptional growth compared to those from the U.S.
Despite a general downturn in stocks following President Donald Trump’s introduction of “reciprocal tariffs,” European and Asian defense manufacturers continued to achieve significant year-to-date gains, with some stocks reportedly climbing over 100%.
Diminished Confidence in U.S. Alliances
David Roche, a veteran investor and strategist at Quantum Strategy, provided insights to CNBC, attributing the surge in non-U.S. defense stocks to a waning trust in the United States as a reliable ally.
He noted that President Trump’s outreach toward Russia during the ongoing Russian-Ukraine conflict and what many considered as a “betrayal” of Ukraine’s President Volodymyr Zelenskyy prompted many nations to reconsider their dependencies on U.S. support.
This perspective is echoed by Trevor Taylor, director of the Defence, Industries & Society Programme at the Royal United Services Institute, a prominent think tank based in the U.K. Taylor highlighted that historically, European nations favored U.S. defense products to affirm a united front under the leadership of the world’s largest economy. However, he emphasized a growing skepticism regarding the U.S.’s willingness to uphold its commitments as an ally, leading to questions about continued investment in U.S. defense industries.
As a result, European countries are increasingly inclined to procure defense equipment from domestic manufacturers or allied nations like South Korea, which share similar strategic objectives.
Roche elaborated that international arms transfer agreements often grant the selling country significant oversight of how the buyer might utilize the munitions. Consequently, with U.S. alliances coming under scrutiny, European and Asian nations prefer sourcing their defense needs from more reliable partners.
An illustrative case occurred when Forbes reported that the U.S. had curtailed its support for F-16 fighters sent to Ukraine, affecting auxiliary systems like radar jammers.
“To maintain an independent defensive strategy, countries must develop their military industrial capabilities,” Roche asserted, emphasizing the importance of either domestic production or sourcing from trusted allies.
In Germany, lawmakers have enacted pivotal reforms enabling a substantial increase in defense funding. In the United Kingdom, Prime Minister Keir Starmer has committed to augmenting national defense expenditures.
The European Union is also crafting plans to mobilize approximately 800 billion euros ($883 billion) to enhance regional security.
This augmented spending is translating into burgeoning order books for manufacturers like ThyssenKrupp Marine Systems, a subsidiary focused on naval systems. CEO Oliver Burkhard mentioned that they anticipate tripling their customer base by the end of the decade and noted, “When it comes to defense, budgets are seemingly limitless now.”
German defense producer Rheinmetall, famous for its Leopard 2 tanks, projected a remarkable increase in defense sales of up to 40% this year, anticipating “substantial orders from military clients.” Remarkably, they expect this upswing in sales even without additional regional defense spending, as they are well-positioned to capitalize on the growing demand.
This growing wave of military expenditure is also buoying Asian defense stocks, particularly due to European manufacturers struggling to ramp up production fast enough. Consequently, this has driven European nations to seek out Asian suppliers for essential military equipment.
Since 2022, South Korean defense firms have been inundated with orders from European nations looking to strengthen their arsenals or replace military equipment sent to Ukraine. Notably, Korea Aerospace Industries provided FA-50 fighter jets to Poland after the country donated its older Soviet-built jets to Ukraine.
Hanwha Aerospace has also secured orders from Poland and Romania for K9 self-propelled howitzers in recent years. This past March, the company announced a substantial rights offering valued at 3.6 trillion South Korean won ($2.5 billion) aimed at investing in both domestic and international defense capabilities.
Furthermore, Singapore’s ST Engineering has recently won contracts for 155-millimeter artillery shells from European nations, marking a significant expansion into the European defense market.
More Than Just Trust Issues
King Mallory, a senior researcher at the Rand Corporation, mentioned to CNBC that another contributing factor to the imbalance favoring Asian and European defense stocks is the historical context of U.S. defense spending dominance. With the U.S. being the largest defense spender, expectations for a significant domestic demand shift towards U.S. defense stocks are limited.
However, as governments globally invest heavily in their domestic defense sectors, it causes a pronounced surge in demand that significantly revalues defense stocks in Asia and Europe compared to their American counterparts.
Japan is a prime example, where stock values of domestic defense companies have soared despite stringent arms export regulations. Japan’s announcement to boost its defense budget to 2% of GDP by 2027, a target previously capped at 1%, reflects this trend.
As for the future, the analysts predict that this heightened demand for defense stocks is not a fleeting phenomenon; it is likely to endure for several years, potentially lasting for a decade or more. Roche from Quantum Strategy states, “This is not merely a choice between military and civilian expenditures; rather, it’s about addressing the imbalance where there’s excess in civilian spending and insufficient military preparedness. The demand for defense resources is poised to remain strong for at least the next decade.”
— Additional insights provided by CNBC’s Chloe Taylor.
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