Europe’s self-reliance drive fuels investment boom

A more self-reliant and less US-dependent Europe is beginning to take shape, drawing investor interest to a region long overlooked. The opportunities extend beyond defence stocks, signalling a broader economic shift.

While caution remains warranted—particularly as Germany’s substantial defence and infrastructure investments take time to materialise—many investors are positioning themselves for the long term, a Reuters report said.

"It seems that MEGA (Make Europe Great Again) trades are now rapidly replacing MAGA trades, which have lost their appeal," noted Mark Dowding, Chief Investment Officer at RBC's BlueBay fixed income team, referring to the shift away from US-centric investments popularised under former President Donald Trump’s "Make America Great Again" slogan.

Brussels' ambitious plan to mobilise up to 800 billion euros (approximately $866 billion) for rearmament and Germany’s fiscal expansion have bolstered the case for defence stocks. European aerospace and defence shares have surged 33 per cent this year, surpassing the valuation multiples of their US counterparts—levels typically seen in the luxury or technology sectors.

Rheinmetall, Germany’s premier tank manufacturer, momentarily commanded a higher valuation than Ferrari, trading at 44 times its expected earnings. Citi forecasts annual profit growth for European defence firms ranging from 8 per cent for BAE Systems to 32 per cent for Rheinmetall through 2028.

However, challenges persist. Despite the EU's intention to source more European-made weaponry, 78 per cent of defence procurement since 2022 has been outside the bloc, with 63 per cent going to US suppliers, according to European Commission data. This underscores the uphill battle in reshaping the region’s defence ecosystem.

The rearmament drive is also benefiting adjacent industries. Firms within the defence supply chain and communications sector are seeing gains, with satellite operator Eutelsat surging 260 per cent this month on speculation that it could replace Elon Musk’s Starlink in providing internet access to Ukraine.

Evli portfolio manager Tomas Hildebrandt emphasised the comprehensive nature of the defence industry, highlighting the significance of logistics, data management, and personnel support.

Additionally, German truckmaker Scania, machinery producer Atlas Copco, and construction firms are poised to benefit from the broader infrastructure push.

Europe’s fiscal landscape is evolving, with both joint EU bonds and increased German debt issuance supporting the euro’s status as a reserve currency. Germany’s planned infrastructure and defence spending could add over a trillion euros to its debt load. Furthermore, the EU is set to jointly borrow up to 150 billion euros to finance defence-related loans for member states, marking a shift towards more integrated financial commitments.

This initiative—dubbed SAFE—will add to the EU’s existing 650-billion-euro debt pile, reinforcing the bloc’s role as a long-term borrower in global markets. However, the loans cover only a fraction of the 800-billion-euro plan, leaving national governments to bridge the gap.

European banks have emerged as a favoured investment, with the sector surging 26 per cent year-to-date—the best quarterly performance since 2020. Germany’s economy is projected to grow by approximately 1.4 per cent in both 2026 and 2027 after years of stagnation, according to Berenberg estimates.

A March survey by Bank of America found banks and insurance firms were the largest overweight positions in European portfolios, followed by industrial stocks. "We are bullish on banks as higher growth expectations should steepen the yield curve, benefiting lenders and spurring credit expansion," said Trevor Yates, Senior Investment Analyst at GlobalX, citing strong demand for its DAX German stocks ETF.

Spanish and Italian equities are also gaining traction, as they remain significantly cheaper than core European markets and are less exposed to US tariffs compared to Germany and France. Societe Generale’s multi-asset strategist Manish Kabra sees an opportunity in southern European stocks, particularly due to their substantial banking sector exposure.

Europe’s drive for energy independence—accelerated since 2022—is another key investment theme. Renewable energy firms and domestic power suppliers stand to benefit as the European Commission pushes measures to speed up permitting for green projects, revise energy tariffs, and expand state support for clean industries.

Germany has earmarked 100 billion euros from its expanded budget to fund climate and economic transformation efforts. Solar power’s share of the EU electricity mix climbed to 11 per cent in 2024, up from 9.3 per cent in 2023, surpassing coal for the first time, according to think tank Ember.

Leading European utility firms, including Iberdrola, Endesa, and Enel, have recorded gains of 7-16 per cent this year, reflecting growing confidence in the region’s clean energy transition.

With defence, banking, infrastructure, and renewable energy driving momentum, Europe appears poised for a period of economic reinvigoration. The shift towards self-reliance, coupled with fiscal expansion, is reshaping the investment landscape. As MEGA trades replace their US counterparts, the European market may finally be stepping out of the shadows, offering compelling opportunities for global investors.