Euphoria grips Europe's defence industry as the world prepares for war

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4 hours ago

Five years ago, Babcock was lurching from one crisis to another. The defence and engineering giant had endured a string of profit warnings and delayed results. Hedge funds were betting its stock price would keep falling, with its shares consistently among the most shorted on the London Stock Exchange. David Lockwood, the incoming chief executive, had a mountain to climb.
Today, Babcock is a stock market darling. The nuclear submarine contractor made a triumphant return to the FTSE 100 in March. Its stock climbed as much as 13pc on Wednesday after it announced a £200m buyback and raised profit targets.
Babcock's renaissance is symbolic of a new confidence sweeping through Europe's defence industry. A world riven by conflict and Donald Trump's threat to withdraw support for Nato is prompting investors to flock to companies with ties to the West's military establishment, buoying share prices and a sense of purpose within the industry.
After years of managed decline for defence, Lockwood says the messaging coming from European governments both in public and privately has shifted considerably.
'I had meetings with mainland European governments, where we're bidding for something, and they said, 'If we selected you, could you go faster?',' he says.
'That's quite an interesting change, because if you went back five years, it would have been 'Can we squeeze any more costs out?' It wasn't whether you could do it, it was whether you could be cheap.
'We're seeing quite a different tone of debate.'
Lockwood declared a 'new era of defence' on Wednesday as Babock reported strong financial results.
Demands from President Trump that Europe pay for its own defence, and that Nato members increase their security commitments to 5pc of GDP, and quickly, has sent stocks soaring as Western governments sign off rising defence budgets with the intention of boosting sovereign suppliers.
In March, Ursula von der Leyen, president of the European Commission, pitched 'ReArm Europe', a plan to increase defence spending by €800bn (£682bn) after the US paused military aid to Ukraine.
The end of the Cold War brought about a systematic decline in Europe's defence capabilities. Between 1990 and 2014, the so-called 'peace dividend' saw security spending in Europe fall from 2.3pc of GDP to as low as 1.3pc. That figure climbed to about 2pc in 2024, but some Nato countries have lagged.
Under Trump, the White House has issued biting criticism of Europe's laxity on defence. A leaked text from Pete Hegseth, the US defence secretary, derided 'European freeloading' as 'pathetic'.
On Wednesday, Nato leaders lavished praise on Trump for jolting Europe out of its reverie and bringing back urgency to defence investment. 'Without President Trump, this would not have happened,' said Mark Rutte, Nato's secretary general, in The Hague. Friedrich Merz, the German chancellor, said there was now 'conviction that Nato as a whole, and especially the European part, must do more'.
Richard Drake, of US hi-tech defence manufacturer Anduril, says there has been a 'fundamental rethinking of defence priorities across Europe' and a 'long-term shift towards rebuilding credible deterrence'.
Tristram Constant, at Applied Intuition UK, which makes autonomous software for the defence sector, adds: 'For the first time in decades, European defence spending is aligning with the scale and complexity of the threats it faces.'
As a result, shares in military contractors are on a tear. Babcock's stock is up about 120pc over the past year. In Europe, Rheinmetall, which builds Germany's Panther battle tank and has supplied Ukraine with its Leopard vehicle, has climbed about 250pc over the past year and is up a staggering 1,600pc since Russian invaded Ukraine.
The pattern is repeated at defence giants across the Continent, from BAE which is developing the Archer howitzer for Sweden to French giant Airbus which has been lined up to build communications satellites for Brussels. The FTSE All-Share Aerospace and Defence index, which tracks defence stocks, is up 57pc over the past 12 months.
Babcock, which maintains the UK's nuclear submarine fleet, in March secured a £1.6bn deal with the British government to maintain and repair armoured vehicles, including the Challenger 2 battle tank that has seen service in Ukraine.
Until recently, European defence stocks had struggled to attract investors who were sticking to environmental, social and governance (ESG) dogma.
Rupert Soames, the grandson of Winston Churchill, compared ethical investors to 'people who eat sausages, but don't want to know how they are made' in The Telegraph in 2021. While there has not been a rush from ESG funds to defence stocks, a handful, such as Allianz have shifted their policies this year on security investments.
Trevor Taylor, at defence think tank Rusi, meanwhile, expects European governments to fund sovereign capabilities that can reduce their reliance on an unpredictable US. He says European governments are now 'significantly more wary of reliance on American equipment'. In critical technologies such as air defence, 'European countries will not want to rely on US-sourced systems'.
Tom Bailey, of defence investment fund HANetf, says: 'Europe must not only spend more on defence, but also spend differently.
'That means building real capabilities and reducing reliance on US-made equipment. Investors have taken note, and have re-rated European defence accordingly.'
Europe has spent too much money on soldiers and not enough on hi-tech equipment compared with the US, he believes. 'Europe now allocates about 32pc of military budgets to equipment. Poland, the bellwether of European rearmament, spent more than half its defence budget on equipment in 2024. Convergence toward that level is likely.
'This shift alone could mean many billions of euros in additional equipment spending – and with it, rising sales and earnings for defence firms.'
Home-grown technology is also benefiting from new investment – in some cases from unlikely investors. Earlier this month, Daniel Ek, the Spotify billionaire, led a funding round for Helsing, a German business planning to manufacture cutting-edge strike drones.
Ek said of the deal: 'There is an urgent need for investments in advanced technologies that ensure Europe's strategic autonomy and security readiness.'
However, Jack Wang, of early-stage venture investor Project A, says in venture and start-up funding 'there's still a very long way to go', with Europe lagging the US.
'European defence capabilities – in terms of tech sophistication and production capacity – remain far behind what we've seen deployed in Ukraine,' he says.
Leaders are aware of their shortcomings and are playing catch-up. To further boost the sector, the European Commission has said it will loosened rules governing defence mergers and cut environmental red tape.
According to Lockwood, revived defence investment in Britain should also help rejuvenate neglected parts of the country – what he dubs a 'defence dividend'. Increased defence investment will 'strengthen the relationship between people like us and the communities we work in [and] highlights the value we bring to places like Plymouth with our investments'.
With no signs of Russia backing down in Ukraine and a grim picture in the Middle East, Europe's defence industry looks like a winner as the world prepares for war.
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