From summit to strategy: Europe’s new reality of NATO defence commitments

I was fortunate recently to share dinner and conversation with two leading experts on EU defence, and Europe’s broader security backdrop, as Janus Henderson hosted a client event to discuss this seminal topic for today’s markets.

The NATO Summit was important, not just on the issue of strategic questions around defence, but also geopolitical realignments, risks to European assets, and market disruption across sectors. All have the potential to create opportunities for agile investors, suiting Janus Henderson’s active approach.

In the days leading up to the event, we saw intense focus on the NATO Summit on 24-25 June, amid changes to US defence doctrine, and increasing uncertainty over US commitment to the Alliance and Europe. Recent rhetorical pressure from US Defence Secretary Hegseth and US President Trump iterated the urgency of Europe’s renewed focus on defence spending, making it a key focus for investors across the spectrum, from equities to fixed income.

Expert insight

The keynote speakers at the dinner were General Sir Nicholas Carter, an accomplished strategic expert with decades of military experience, serving as principal military advisor to the UK Prime Minister and as Chief of the General Staff, the official head of the British Army. General Carter was joined by Baroness Catherine Ashton, a distinguished British diplomat and Nobel Peace Prize nominee, who – among other prominent roles – served as the EU’s first High Representative for Foreign Affairs and Security Policy, from 2009 to 2014.

This was the kind of opportunity that we relish, to test our assumptions with direct insight from people who have been involved in high-level decision making in areas that have huge ramifications for us all. Not just in terms of market prospects and challenges, but also the shifting geopolitical dynamics that underpin our lives.

Following the event, it was useful to reflect on this historic shift in strategy towards Europe’s security needs, given it has potentially significant ramifications for investors as countries (and regions) seek to prioritise their own interests.

Defence now a priority in Europe

A positive NATO summit seems to have settled much of the fractious longer-term tensions between the US and other NATO states, which have been laid bare in recent weeks. Following Europe’s NATO members’ commitment to spending 5% of GDP per annum on defence, split between 3.5% of ‘core defence’ spending, plus 1.5% ‘broader security’ spending, the US seems more comfortable within the current NATO framework. This accelerates the trend of higher defence spending by NATO members that we have seen over the past decade (Exhibit 1):

Exhibit 1: NATO defence spending has been steadily ramping up

Source: NATO, Defence Expenditure of NATO Countries (2014-2024), 17 June 2024. GDP=gross domestic product. NATO=The North Atlantic Treaty Organization, an intergovernmental transnational military alliance of 32 member states (30 European and two North American). Data excludes Iceland, which has no armed forces.

The summit put in place new pathways for what will be required from Europe, in terms of security and defence, and its need to achieve strategic autonomy. It also gave a degree of clarity about what the US is willing commit, that aligns with its vested interests, at a time when the US is signalling a shift in focus from Europe to the Indo-Pacific.

What was clear is that Europe remains highly reliant on US intelligence, reconnaissance technology and defence capabilities, something that will take years to develop independently. Higher spending needs to be matched by improved cohesion, overcoming issues with interoperability between NATO members’ military capabilities.

There is also recognition that member states in Europe need to improve their procurement processes to ensure that money is spent more optimally. Complex European defence supply chains mean that rebuilding capacity is likely to be slow and difficult, and it needs to focus on meaningful large-scale gains, rather than low volumes of expensive equipment.

“With an ambitious new Defence Investment Plan to spend 5% of GDP for defence, this will mean a huge defence dividend. An engine of growth for our economies, driving millions of jobs, on both sides of the Atlantic.” NATO Secretary General Mark Rutte, 24 June 2025

Investor ramifications

The imperative for states to ‘buy European’ in security and defence has gained significant momentum, driven by a confluence of geopolitical pressures, a focus on supply chain resilience and domestic European political shifts. The pressure for investors is to identify those companies that are best placed to meet those ongoing and future needs – not just in the security market, but across industries and sectors, such as transport, energy and utilities, technology, communications, surveillance, etc.

There is also recognition that critical physical and digital infrastructure requires protection from ‘hybrid’ threats, spanning cyber and communications systems, energy grids, transport networks, and undersea cables/pipelines. Which is generating a range of opportunities for investors across asset classes.

The security challenges facing Europe have forced a dramatic change in attitude towards defence capabilities, but they also have ramifications for the broader economy. Higher defence spending raises discussion around fiscal rules (nationally and supranationally). We expect sharp political and fiscal trade-offs, as “welfare vs warfare” debates gain salience, but also positive pressure for EU reform to boost growth.

We have seen the EU respond to this pressure, evidenced by European Central Bank (ECB) banking reforms, regulatory updates on EU securitisation, and Germany loosening its debt rules, etc, with a significant planned additional allocation to defence spending (Exhibit 2). Changes like this can help to improve competitiveness, encouraging growth and attracting investment.

Exhibit 2: Germany’s budget plans more than double defence spending

Source: NATO, SIPRI, UBS. Note: The blue line refers to SIPRI data, the orange line is NATO data, which began in 2014. Both use slightly different definitions to categorise spending. The green dotted line is Germany’s forecasted defence budget spending to 2029.  There is no guarantee that past trends will continue, or forecasts will be realised.  

Deglobalisation reflects global tensions

In the past, the influence of globalisation, and the development of highly integrated supply chains, has facilitated the growth of trade with lower-cost countries, leading to cheaper imports. We are seeing an end to globalisation acting as a contributing cap on inflation as we shift back towards a more multipolar world.

While globalisation is far from the sole determinant of what happens to inflation, renewed geopolitical tensions, triggered by US-driven trade protectionism (including tariffs), are likely to disrupt global trade and supply, with a consequent impact on prices. Companies and governments are reacting to that change to try and mitigate the risks, reflected in the drive towards reshoring, onshoring or near-shoring, with the potential impact on supply chains varying between countries. This applies not only to the trade of physical goods, as different jurisdictions prioritise their own economic and political necessities, but also services.

This fast-evolving environment is one that increases the risk of unexpected shocks and sudden changes, both in trade and regulatory divergence. While we expect higher volatility to persist, reforms underway in Europe could be a long-term positive for both European growth prospects, and stock markets.

Fear of missing out (FOMO)

The start of 2025 has seen something of a recalibration in financial markets, with uncertainty in the US opening the door to a long-awaited period of relative strength for European equities. The increased allocation of capital from investors towards Europe comes at a time when the EU is making significant spending commitments in response to evolving global risks. But what also remains clear is that Europe still offers better diversification in its markets than the US, and remains very attractively priced, relative to history (Exhibit 3).

Exhibit 3: Europe offers more diversification, at an arguably attractive price

Source: Bloomberg consensus forecasts, Janus Henderson Investors analysis, as at 31 May 2025. Past performance does not predict future returns.

The most recent cycle of US stock market outperformance originates in the post-financial crisis era. The duration of such market dominance has created a natural hesitancy among investors, that a meaningful strategic shift away from the world’s biggest market could leave them vulnerable to missing out, should the US reassert its market leadership.

While this hesitancy seems understandable, we see the potential for a broadening and diversification in market focus as a positive. But the nature of today’s market structure suggests that that allocations are more likely to see a slow shift, rather than a seismic switch.

From our perception, the rise of passive investing has made longstanding investment trends more ‘sticky’. We see this exhibited in the extreme weighting of investment in narrow innovation ‘clusters’ in the US economy; high growth, big-tech behemoths like Alphabet, Microsoft and NVIDIA have hoovered up so much of investors’ attention.

These advantages can be hard to break, and inevitably create a risk of ‘over-valuation’ (asset bubbles). When a small number of companies dominate a market to such extent, overall market performance can become heavily reliant on the fortunes of just a few stocks. We would be encouraged to see the market spread out more, opening the door to renewed price discovery, better pricing dispersion, and greater opportunities for active investors to differentiate themselves from the pack.