Defence was a key theme at the ASX Investor Day in Sydney, with many analysts telling investors they anticipate massively increased investment in the near future, particularly in Europe.
Last week, the Secretary-General of the North Atlantic Treaty Organization (NATO) quantified just how much extra investment is needed — and it's major.
On top of that, it needs to happen fast.
Secretary-General Mark Rutte called for all 32 NATO member countries to increase their defence spending from 2% to 5% of gross domestic product (GDP).
This new spending target aligns with the conclusions of NATO defence ministers, who met earlier in June to discuss security concerns.
In a speech in London last week, Rutte said:
5% is not some figure plucked from the air, it is grounded in hard facts.
The fact is, we need a quantum leap in our collective defence.
Our decisions on defence spending are driven by NATO's battle plans and capability targets. And last week, NATO Defence Ministers agreed ambitious new targets.
Rutte hopes to secure an agreement to raise defence spending to 5% of GDP at the 2025 NATO Summit at The Hague on 24–25 June.
What would 5% GDP be spent on?
Rutte suggests NATO nations spend 3.5% of GDP on core military requirements and 1.5% on defence investments, including infrastructure and building industrial capacity.
Rutte said NATO needs a 400% increase in air and missile defence, thousands more armoured vehicles and tanks, millions more artillery shells, and a doubling of enabling capabilities, such as logistics, supply, transportation, and medical support.
He said:
Allies will invest in more warships and aircraft. To give just one example, America's Allies will procure at least 700 F-35 fighter jets in total. We will also invest in more drones and long-range missile systems. And invest more in space and cyber capabilities.
In terms of infrastructure, Rutte said:
Roads, rail and ports are just as important as tanks, fighters and warships. We need civilian transport networks that can support military mobility. To get the right forces, to the right place, at the right time.
He added that NATO's defence industrial base must rapidly expand to allow for greater production:
We need cheaper electricity, access to critical minerals, and more engineering know-how.
Timing is critical
Rutte says the timing of this new defence spending is urgent given Russia and China are rapidly expanding their military might.
He said, "Russia could be ready to use military force against NATO within five years."
Rutte explained:
Russia has teamed up with China, North Korea and Iran. They are expanding their militaries and their capabilities.
Putin's war machine is speeding up – not slowing down.
Russia is reconstituting its forces with Chinese technology, and producing more weapons faster than we thought.
In terms of ammunition, Russia produces in three months what the whole of NATO produces in a year.
And its defence industrial base is expected to roll out 1,500 tanks, 3,000 armoured vehicles, and 200 Iskander missiles this year alone.
Rutte said China was modernising and expanding its military "at breakneck speed".
It already has the world's largest navy. And its battle force is expected to grow to 435 ships by 2030.
China is also building up its nuclear arsenal. And it aims to have more than 1,000 operational nuclear warheads, also by 2030.
What about the US?
Europe is not just concerned about potential aggressors like Russia and China, but also its supporters.
The US Government has been calling for Western countries to aggressively raise their defence spending.
The US Trump administration has made it plain that America is tired of being the world's traditional primary defender.
Many nations now fear the United States will not support them in a conflict.
Last week, the US Government announced it was reviewing the AUKUS deal to ensure it aligned with Trump's 'America First' policy.
So, what does all this mean for investors?
Here's what the ASX shares investment experts say
At the ASX Investor Day, many analysts raised defence and what is happening in Europe, in particular.
Antipodes portfolio manager Vihari Ross said:
Trump has kicked off a new investment cycle in Europe because Trump has indicated Europe needs to sort itself out.
George Platt from Plato Investment Management agreed, saying:
MAGA has become MEGA. Europe is now increasing its defence expenditure. It's woken Europe up.
Cameron Gleeson from Betashares, which launched the Betashares Global Defence ETF (ASX: ARMR) last year, commented:
Europe is seeking to become more self sufficient.
European defence companies are likely to do very well.
The ARMR ETF is up by more than 50% since it listed in October.
ARMR provides exposure to up to 60 companies that derive more than 50% of their revenue from the defence industry.
ARMR ETF's top five shares are German tank maker Rheinmetall AG (ETR: RHM), US data analytics firm Palantir Technologies (NASDAQ: PLTR), UK defence and aerospace giant BAE Systems PLC (LSE: BA), French aerospace and defence group Safran SA (EPA: SAF), and US missile and radar manufacturer Raytheon Technologies Corp (NYSE: RTX).
Carta Ryan, portfolio manager for the Firetrail Australian Small Companies Fund — Active ETF (ASX: FSML), said:
There's one compelling thematic I believe you cannot ignore and that is defence spending.
Ryan said one of the fund's high-conviction ideas today was fuel security.
Bell Direct analyst Grady Wulff says her team has a buy rating on ASX defence share Droneshield Ltd (ASX: DRO).
Droneshield makes drone defence systems.
Wulff said:
Droneshield is in the right place at the right time. Their contracts are going from strength to strength.
Check out some other ASX defence shares and ETFs.
