At the recent NATO summit in The Hague, a major shift in defence policy was announced, setting the stage for significant changes across the alliance. With rising global tensions and renewed commitments from member states, the implications for defence strategy and industry are substantial. Read on to explore what this means for NATO, global security, and defence-related investments. Our Jersey Investment Director, William Lamond, takes a closer look at the key takeaways from the last few days.
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The NATO summit at the Hague, which concluded on Wednesday, with the decision that all members should increase expenditure on defence to 5% of GDP by 2035. This is a noticeable step change as members have previously agreed to spend 2% of GDP and with exception of a few have spent below this level for the last decade as they became used to the USA being the default protector of NATOs borders.
The 5% spend will be broken down as 3.5% into direct defence and the other 1.5% will be spent on cyber security and infrastructure. This increase is believed to improve NATOs ability to defend itself against potential threats from Russia, which has become more belligerent in recent years as it has been marked as a pariah by NATO for its ongoing invasion of Ukraine.
Unfortunately, this belligerence has been mirrored by China and other members of the aptly named ‘Axis of Evil’, who have increased their military forces and activity. China in particular has expanded its forces. For example, it has increased its navy in the last 4 years by the size of the entire British navy. It has also become more active with military exercises in the South China Sea and Pacific Ocean.
The increase in defence expenditure will certainly benefit defence companies in NATO countries. Western European companies such as Rheinmetall, Thales, Leonardo, Babcock, et al have already started to see increased orderbooks as governments jockey to order defence platforms in a capacity constrained industry. To alleviate the capacity constraints, companies have already begun to build new facilities or expand into unutilised space. They have also taken advantage in the current malaise in the automotive market by hiring engineers and other ancillary workers who would otherwise be laid off. Additionally, they have looked to set up joint ventures to ensure their expertise can be maximised in the development and manufacture of weapons systems.
This increased activity has already benefited a swathe of defence companies, particularly outside of North America as their profitability has improved and management have increased earnings guidance for the medium term. This has resulted in strong share price appreciation which have expanded their PE multiples to record levels, and one could argue are beginning to look expensive in the short term. Over the coming years we expect earnings will be demonstrably increased and almost certainly will be supportive of the current multiples these companies trade on.
At Oakglen, we currently hold Rheinmetall, Thales, Leonardo and Babcock in our discretionary models and although we have taken some profit, continue to believe in their investment cases. We also hold US listed RTX and Lockheed Martin as we feel they will also benefit from the increased NATO expenditure but will benefit more from the increased defence expenditure from the USA, as it reacts to China’s increasing military threat.
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Hear more from the Oakglen experts
Our investment team continue to provide interesting and informative content to help keep you in the loop on recent global news and market trends. See below for some key highlights from around the world which some of the investment management team have recently covered:
Read more:
- Central Bank Update: June 2025 – The Summer Snooze
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- Middle East Tensions Escalate: Market and Oil Price Impacts
William Lamond, Investment Director (Jersey)
- June 2025 Investment Summary
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You can read other articles from the team on our News & Insights page.
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