Winner of Europe’s Rearmament: Defense Electronics

• Ben Leyland
  Senior Fund Manager
  JOHCM Global Opportunities strategy

European defence stocks have performed strongly. They are no longer cheap, yet valuations still reflect conservative assumptions, pricing in the low end of reasonable growth over the next 10–15 years. While the shift in defence spending, from below 2% of GDP pre-2020 towards 3% and beyond is partly recognised by markets, it captures only part of the opportunity, with additional upside from changes in procurement behaviour and the mix of defence spending.

Our analysis suggests that double-digit growth for European defence companies is underpinned for at least the next 5–10 years. Even a modest increase in defence spending from 2% to 3% of GDP supports low-teens growth in the sector. Two powerful underappreciated ‘growth multipliers’ provide additional upside. 

• A Rise in Equipment Intensity: Only around 30–35% of defence budgets are currently allocated to equipment, leaving significant scope as militaries modernise.
• “Buy Europe” Procurement: Of that equipment spend, only around 30% historically flowed to European suppliers, due to reliance on US firms. The EU commission has raised this target to invest 50% in European suppliers by 2030 and 60% by
  2035.

These dynamics support the potential for sustained mid- to high-teens growth in the sector, with upside scenarios extending into the low 20% range over certain periods. This view is reinforced by recent capital markets updates from leading European defence companies, highlighting management confidence that political commitments will convert into tangible orders.

Defense electronics is gaining structural importance

Not all defence exposures are equal. As automation, cyber capabilities and electronic deterrence become more central to warfare, defence electronics are structurally more important than traditional hardware such as tanks or ammunition, which has driven recent growth but offers less durability.

We favour long-cycle electronic systems over short-cycle consumables. These long-cycle electronic systems are often described as C4ISR (command, control, communications, computers, intelligence, surveillance and reconnaissance) coined by the U.S. Department of Defence in 1996. They benefit from structural growth as armed forces undergo comprehensive modernization processes. In addition, they exhibit greater resilience to ceasefires and conflict resolutions and can be deployed more broadly across different platforms and geographic regions.

This shift is reshaping defence investment priorities and reinforcing the role of electronics and C4ISR companies in delivering modern deterrence. We have owned companies such as Thales since before COVID, reflecting our long-standing conviction in the defence sector. These companies represent the “brains” of modern military capability -long-cycle products that benefit from sustained modernisation rather than near-term conflict dynamics.

We have consistently viewed defence as investable, underpinned by high barriers to entry and limited Chinese competition. Our original investment case for Thales focused on diversification and strategic optionality, with rising European defence budgets since 2022 further strengthening our conviction.

By contrast, some other defence players, such as Rheinmetall, are more exposed to short-cycle products such as missiles and ammunition, where demand can fall sharply following ceasefires. Given long-term underinvestment in European defence, we believe electronics-focused companies are best positioned for durable growth.

Rheinmetall, Hensoldt and RENK Group with ambitious growth plans

Recent capital markets updates from European defence companies reinforce management confidence that higher defence budgets will translate into orders. German groups including Rheinmetall, Hensoldt, and RENK Group have outlined ambitious growth targets, with Rheinmetall guiding to 35–40% revenue growth over the next five years, while Hensoldt and Renk expect around 15–20% CAGR. These projections align with our analysis, which points to sustained high-teens growth across the sector.

The timing is notable. Following a strong rally in early 2025, defence stocks paused as markets awaited political commitments to translate into orders – a typical lag in defence cycles. We do not believe the sector is overvalued; valuations continue to reflect relative to the scale, duration and quality of the opportunity. With structural drivers firmly in place, higher budgets, rising equipment intensity, increased European procurement and a shift towards long-cycle electronics, European defence remains a compelling long-term story with scope for sustained earnings growth and valuation support over the decade ahead.