Geopolitical tensions are driving an unprecedented expansion in global defence budgets. At the 2025 NATO Summit, allied nations committed to a new spending target: allocating at least 3.5% of GDP annually on defence expenditure by 2035, with total defence and security spending reaching 5% of GDP.

This represents a massive escalation. Major European markets are expected to see defence spending increase by 60% by 2030, creating substantial opportunities across the aerospace and defence supply chain for companies like Rolls-Royce. EU member states’ defence investments already reached €106 billion in 2024, up 42% year-over-year, with projections of nearly €130 billion for 2025.

The spending surge is driven by multiple factors. Russia’s ongoing aggression and hybrid warfare operations against NATO states have created an acute sense of vulnerability, while China’s military modernisation and assertiveness in the Indo-Pacific is also driving concerns.

And rather than simply buying American weapons, European nations are coordinating procurement to develop indigenous defence industries. Requirements increasingly favour European manufacturers, with targets to source 55% of weapons from European or Ukrainian suppliers by 2030. Germany’s procurement plan through 2026 allocates only 8% to US suppliers, a dramatic shift from recent years.

For investors, this creates opportunities across multiple segments. Defence contractors focused on artillery, missiles, drones and air defence systems are primary beneficiaries. But the spending extends beyond traditional weapons to encompass cybersecurity, space-based systems, AI-enhanced military capabilities and critical infrastructure protection.

Defence technology represents a particularly attractive niche, with significant investment flowing into autonomous systems, advanced sensors, satellite communications and electronic warfare capabilities.

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