A new era for European defence

In his commentary, Roel Houwer, Senior Product Manager at VanEck Europe, explains why this is about much more than the war in Ukraine and what it can mean for investors.

Many of those responsible in NATO member states now see the urgency of significantly expanding their national defence capacities for their own territorial security. This is not least due to the fact that individual member states and Europe as a whole would be heavily dependent on support from individual countries, particularly the USA, in a defence scenario.

More and more NATO countries seem to have recognised the signs of the times and are now taking the target set back in 2014 of spending at least two percent of gross domestic product (GDP) on defence more seriously. This year, 18 of the 31 NATO member states are already expected to meet this target – compared to just seven last year. In a recent study, JP Morgan predicts that all NATO members will exceed the two per cent threshold of their defence spending in the coming years – which could lead to an increase in average spending by NATO countries of up to 21 per cent in the near future.

Europe wants to become more independent – and is investing

The urgency now also seems to have reached European countries such as Germany, which have historically been rather cautious and are expected to exceed the two per cent threshold again this year for the first time in decades. While instability at Europe's external borders continues to pose an enormous risk to European security, Chancellor Scholz is calling for a preventive strengthening of European defence capabilities – this could be the impetus for a long-term reduction in Europe's dependence on the US military's protective shield.

EU Commission President Ursula von der Leyen also recently called on the states of the European Union to promote arms production in order to strengthen the military-industrial complex in Europe and expand the EU's defence capabilities. When developing a strategy for an all-European defence industry, the EU Commission also wants to rely on the experience gained from the pan-European use of taxpayers' money to promote the production of COVID-19 vaccines and for the joint purchase of gas.

Multitude of risks lead to high investment needs

Tensions between Russia and NATO and the EU could increase rather than decrease in the future and there is currently no sign of improvement. However, there are also a whole range of other long-term factors that increase geopolitical tensions and necessitate higher military and security spending. For example, the trade and strategic conflicts between the USA and China stand before an uncertain outcome.

In addition to traditional military conflicts, cyber attacks have developed into a growing risk that has now also become a national security issue due to the enormous importance of the global digital infrastructure for economies. In addition, globalisation, which has long been taken for granted, has come to a standstill: The COVID-19 pandemic in particular has made it clear how dependent many countries are on importing goods. In addition, nationalism, protectionism and populist movements are on the rise worldwide, which in turn is leading to growing geopolitical tensions.

For companies in the security and defence sector, these developments are likely to mean increasing demand and full order books in the long term. Even though the topic of armaments is traditionally a sensitive one, many people's assessment and understanding of the relevance of this topic has changed since the start of the war in Ukraine at the latest. Many investors now see great opportunities in shares of companies in the security and defence sector: Our VanEck Defense UCITS ETF, which focuses on companies that generate the majority of their sales in the military and defence industry with its pure-play approach, has grown to a fund volume of over USD 400 million in just under a year since its launch in April 2023.

Risk warning:

An investment in VanEck Defense UCITS ETF is associated with risks, in particular:

Industry or sector concentration risk: The assets in the VanEck Defense UCITS ETF may be concentrated in one or more particular sectors or industries. The ETF may be subject to the risk that economic, political or other conditions adversely affecting the relevant sectors or industries may adversely affect the performance of the Fund to a greater extent than if the Fund's assets were invested in a wider variety of sectors or industries.

Liquidity risks: Liquidity risks arise when it is difficult to buy or sell a particular financial instrument. If the relevant market is illiquid, it may not be possible to enter into a transaction or to liquidate a position at a favourable or appropriate price, or at all. This is a factor to consider when investing in a defence ETF.

More detailed risk warnings, further information as well as the basic information sheet and sales prospectus for the VanEck Defense UCITS ETF can be found at https://www.vaneck.com/de/de/verteidigungs-etf/