Europe’s post-1945 security order is breaking down. The political assumptions that underpinned transatlantic stability are being questioned, with long-standing roles being overturned. For investors, the implications are structural rather than diplomatic.
Having launched the Global Security Fund in 2019, we assumed that decades of declining defence spending had left Europe with eroded industrial capacity and growing dependence on US military power.
In large part, our analysis has aligned with this development. European governments have since moved to rebuild defence budgets and industrial capacity.
At the recent Munich Security Conference, that shift was described in stark terms, with the United States portrayed as a disruptive force hitting the transatlantic relationship like a wrecking ball.
Our new senior strategic advisor, Ben Hodges, former commanding general of US Army Europe, said: “Europe needs to take command over its own agenda. If Europe does not present a coherent grand strategy, it will remain vulnerable to pressure from the great powers. This is not a lack of military capacity but a lack of political courage to use the capacity that already exists.”
Earlier in 2026, rhetoric about Greenland and tariffs against allies unsettled European capitals. Abrupt shifts in international power politics can sometimes benefit Europe by creating uncertainty in Moscow, which prefers clear, predictable signals.
However, this unpredictability also unsettles allies, undermining confidence when security cooperation and long-term defence planning require stability.
From an investment perspective, we identify four dynamics that are likely to shape defence markets over the coming decade.
First, Russia’s strategy is built on sustained industrial production and capacity expansion. In 2024, Russian production of artillery ammunition reached an estimated 250,000 shells per month, more than double NATO's output.
This reflects industrial policy decisions taken years earlier and points to sustained demand for production capacity and resilient supply chains rather than short-term procurement spikes.
Second, defence investment in Europe should be assessed in the same way as other long-term infrastructure. Investors already evaluate multi-year transitions in energy and digital networks. Defence production follows a similar logic, requiring large upfront investment, close government involvement and long procurement cycles, with returns defined less by short-term profit and more by reduced risk and greater resilience over time.
Third, Europe’s rearmament is structural rather than cyclical. Defence spending declined from 4-6% of GDP during the Cold War to roughly 1.5-2% between 2000 and 2022.
Current commitments point towards levels approaching 5% by 2035, with European defence procurement projected to grow by around 11% annually, amounting to more than $4trn.
Finally, higher budgets alone do not guarantee effective capability. Without strategic coherence and political resolve, increased spending risks inefficiency. Europe’s challenge is less about the absence of military assets and more about the willingness and ability to integrate and employ existing capacity effectively over time.
This perspective guides our assessment of defence markets. We manage exposure by tracking how policy decisions feed through to defence spending, capability priorities, demand, production capacity and foreign relations.
As defence budgets rise not only in Europe but also across the Indo-Pacific, we assess how this expansion develops over time across large prime contractors and selected small- and mid-cap companies embedded in critical supply chains.
In Europe alone, this is underpinned by rising national defence budgets and more than €90bn in approved support for Ukraine for 2026–27, alongside the European Union’s Readiness 2030 framework, which anchors spending to defined capability priorities and multi-year procurement.
In the US, the emphasis has increasingly shifted towards delivery capacity and industrial endurance rather than technological edge alone. Defence policy and procurement have moved from a just-in-time mindset to a just-in-case approach, where scale, long-term contracts and supply security are central.
This shift has also been reflected in political signalling, with president Donald Trump urging defence companies to prioritise capacity expansion and delivery reliability over share buybacks, dividends and elevated executive compensation, as part of a broader effort to strengthen industrial readiness.
These dynamics help explain the defence sector’s strong performance through 2025 and into early 2026. Higher budget commitments, clearer policy direction and growing order backlogs have improved visibility across the sector.
The most recent reporting season for the fourth quarter and full year 2025 reinforced this picture, with several companies reporting record order books, solid organic growth and improving margins.
So far, Europe has been too reactive. We believe Europe needs to take control of its own agenda. Without a coherent grand strategy it will remain exposed to pressure from the great powers. Europe has substantial military capacity, yet political resolve has been insufficient to employ and integrate it effectively.
For the transatlantic relationship to function on stable terms, Europe cannot be subservient. Recent results from Saab, RTX, Hanwha Aerospace and Kongsberg confirm that defence demand is structural, with record order books, double-digit organic growth and expanding margins underpinning multi-year visibility.
These figures strengthen the case for companies positioned in priority capabilities such as integrated air and missile defence, precision munitions, naval combat systems and scalable ammunition production.
Strong backlogs, balance sheet improvements, and committed capital expenditures signal industrial endurance rather than short-term procurement spikes.
In our view, firms already aligned with Europe’s Readiness 2030 priorities are not just beneficiaries of higher budgets, but central to translating spending into credible, integrated military capability.
Joakim Agerback is manager of the Finserve Global Security fund. The views expressed above should not be taken as investment advice.