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Thought of the day

The 2026 Munich Security Conference concluded with fewer tensions than last year. But the underlying rebalancing forces in the transatlantic alliance were unmistakable. US Secretary of State Marco Rubio’s address was more warmly received, with Rubio calling the US “a child of Europe” and speaking of an “unbreakable link.” Nevertheless, there was no clear shift from the US on key sticking points over security and burden-sharing, and Rubio notably skipped a key meeting with European leaders on Ukraine's defense.

European Commission President Ursula von der Leyen warned that “some lines have been crossed that cannot be uncrossed anymore,” while German Chancellor Friedrich Merz revealed new talks with France on strengthening Europe’s own nuclear deterrent. An unnamed European minister quoted by the FT described the transatlantic relationship as not broken but “significantly different from what we are used to.” Greenland did not feature heavily in public discussions, though Danish and Greenland leaders reportedly met with Secretary Rubio on the sidelines.

While no new major spending announcements were made, several catalysts continue to support the investment case for the global defense sector.

Defense budgets are on a rising trajectory. The direction is clear: President Trump has called for a 50% increase in the US defense budget for 2027, and has pressured NATO allies to hit their 5% of GDP spending target, underscoring a structural shift in allied spending. Germany, Poland, and the Nordics are already on track to meet or exceed these levels, while Germany’s latest EUR 52bn package underscores its new commitment. This policy clarity provides a multi-year runway for defense sector growth.

Sustained demand from geopolitics, supply chain reshoring. The ongoing conflict in Ukraine, persistent tensions with Russia, and supply chain vulnerabilities are driving Europe’s push for strategic autonomy and rearmament. The Munich talks revealed new momentum around building a “self-supporting strong pillar within the alliance” to give it more operating room within NATO to pursue its interests. US and Asia-Pacific trends also point to rising investment and diversification. Countries like Japan, South Korea, India, and Australia are expanding local defense manufacturing and prioritizing self-reliance to reduce import dependence.

AI, next-gen tech, and modernization as drivers. From advanced missile systems to digital resilience, both Western and Asian defense budgets are increasingly focused on next-generation capabilities and innovation. The US and Asia-Pacific are accelerating spending in advanced technologies, with China’s defense budget up 7.2% and APAC military outlays set to rise 5.1% this year. European nations are also investing in missile defense systems, satellite infrastructure, and digital platforms to improve operational effectiveness and resilience.

So, we view this year’s Munich Security Conference as a reaffirmation of the direction of travel for global defense: higher budgets, strategic autonomy, and rapid modernization. We remain constructive on European defense, favoring diversified suppliers and innovation-led subsectors, especially firms with strong US sales or exposure to German and broader European contracts. For US defense, we maintain a neutral stance, prioritizing diversified missiles and munitions manufacturers, subcomponent suppliers, and companies with commercial aerospace exposure over traditional large defense contractors.

We believe investors should remain focused on companies best positioned for this multi-year rearmament cycle. Read more in our recent CIO note, “Defense: CIO’s Views and Investment Implications.”