European defence is moving into what some investors see as a structural rearmament cycle, driven by higher Nato spending targets, technological change and the need to replace ageing equipment.
Speaking at the HANetf Investment Conference in London held last week, Axel Belorde, head of business development Emea & Asia at ETF indexing and analytics firm TMX VettaFi, said that defence should be treated as a long-term allocation rather than a short-term reaction to geopolitical headlines.
“The tailwind is now real,” he said, pointing to binding budget commitments and formal recognition of cyber security, AI and quantum technologies within defence spending frameworks.
Global military spending reached a record $2.7trn in 2024, up 9.4% year-on-year, with Nato accounting for around 55% of total expenditure (Stockholm International Peace Research Institute). Having met the previous 2% of GDP target, alliance members have agreed to lift spending to 5% of GDP, with 3.5% allocated to core defence and 1.5% directed toward non-traditional areas including cyber security, AI and defence innovation.
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At the European level, the EU’s ReArm Europe and Readiness 2030 plans envisage up to €800bn in additional defence-related investment through fiscal flexibility and loan mechanisms. Alongside spending increases, policymakers are seeking to reduce fragmentation across national defence industries.
Defence today spans far more than traditional land, sea and air capabilities, Belorde stressed. Modern military strategy increasingly operates across multiple domains — land, sea, air, space and cyber — with data integration and secure communications linking them.
Across Europe, large portions of military hardware remain legacy systems, with around 50% of land systems and submarines, 80% of land-based air defence systems and 35% of air systems dating back to pre-1990 generations (McKinsey & Company).
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The European Defence Agency has also identified ten forward-looking defence scenarios shaping capability development through 2040, including AI-enabled “software battlefields”, autonomous and unmanned platforms, space as a military domain, quantum sensing and navigation, cognitive enhancement technologies, climate-driven conflict risks and the growing weaponisation of misinformation. These themes, Belorde said, underline how future defence spending will extend well beyond conventional hardware procurement.
“While AI can assist in identifying code vulnerabilities, securing entire government and defence systems remains the domain of specialised cyber firms,” Belorde said, arguing that cyber security architecture is distinct from generative AI tools.
Autonomous systems, drones and electromagnetic defence technologies are emerging as focal points of investment. Modern conflict, he suggested, increasingly depends on “asymmetric capabilities — systems that are relatively low-cost but deliver outsized strategic impact.”
For investors, the takeaway is simple: defence innovation isn’t just about the big legacy contractors anymore. As governments lock in spending on cyber, AI and advanced tech, this space is starting to look less like a short-term, cycle-driven trade and more like a long-term structural growth story.
