The EU-Canada Defense Pact: A Bullish Signal for Transatlantic Defense Stocks

The June 23 Canada-EU summit, where Prime Minister Mark Carney finalized Canada's accession to the EU's €150 billion Security Action for Europe (SAFE) program, marks a pivotal moment in global defense spending trends. This strategic partnership, paired with NATO's push for member states to raise defense budgets to 5% of GDP (up from the current 2% average), creates a multiyear tailwind for defense equities, cybersecurity firms, and cross-Atlantic supply chain players. For investors, this is a rare opportunity to capitalize on a structural shift toward transatlantic military collaboration—and a retreat from U.S. defense dependency.

The Strategic Rationale: Why This Pact Matters

The EU's SAFE program, which entered force in May 2025, is a €150 billion loan facility designed to fund joint defense procurement projects among member states and select allies like Canada. The program's “European preference” clause requires 65% of weapons systems to be sourced from EU or partner nations with a security pact—a rule that creates guaranteed demand for European and Canadian defense manufacturers.

Canada's participation is a strategic pivot. The country currently directs 75% of its defense capital spending toward U.S. suppliers, but Prime Minister Carney has vowed to cut this dependency amid U.S. President Donald Trump's erratic NATO policies and threats to sell “toned-down” military equipment to allies. By joining the SAFE program, Canada gains access to a coordinated defense spending pool and reduces its exposure to geopolitical whims in Washington.

Meanwhile, NATO's 5% GDP defense spending target, while ambitious, is gaining traction. Germany, for instance, has already committed to spending 2% of GDP annually until 2030. This creates a sustained revenue stream for defense contractors, with the EU's ReArm Europe plan aiming to mobilize over €800 billion in defense spending by 2030.

Key Investment Themes to Exploit

1. Defense Contractors: The Immediate Winners

The SAFE program's focus on joint procurements in categories like air defense systems, drones, AI, and electronic warfare will boost demand for firms with transatlantic exposure.

• Thales (EPA: HO): The French multinational is a leader in radar systems (e.g., the THALES initiative with Bulgaria) and cybersecurity. Its stock has risen 18% YTD, but its valuation remains reasonable at 16x forward earnings.
• Airbus (EPA: AIR): A key supplier of military transport aircraft and missile systems, Airbus stands to benefit from pooled procurement deals.
• CAE (TSX: CAE): Canada's training simulation giant is a critical partner for EU fighter jet programs, with a 30% stake in the joint Franco-German-Mexican Tempest fighter project.

2. Cybersecurity Firms: The Silent Growth Engine

The EU's cybersecurity funding (€145.5 million allocated in 2025) and Canada's push to modernize its cyber defenses create a $20 billion addressable market by 2030.

• Cybercom (STO: CYBER): A Swedish firm specializing in military-grade cybersecurity, it's a supplier to NATO's cyber defense centers.
• BlackBerry (NYSE: BB): Its cybersecurity division, which focuses on protecting critical infrastructure, is partnering with Canadian and EU governments.

3. Materials & Tech Suppliers: The Unsung Heroes

The demand for rare earth minerals, advanced composites, and AI-driven logistics systems will favor niche players:

• Rio Tinto (NYSE: RIO): Supplies titanium and niobium for aerospace alloys. The company's Canadian operations could benefit from EU raw material partnerships.
• Hexcel (NYSE: HXL): A leader in carbon fiber composites for fighter jets.
• Palantir (NYSE: PLTR): Its AI-driven supply chain management tools are critical for coordinating transatlantic logistics.

Cross-Atlantic Supply Chains: A New Trade Paradigm

The EU-Canada pact signals the start of a “defense trade bloc” model, where transatlantic collaboration replaces reliance on China for critical materials. For example:

• Rare earths: Canada's First Quantum Minerals (TSX: FM) is positioning itself as a strategic partner for EU projects, given its cobalt and copper reserves.
• AI & Data: Canadian firms like D-Wave Systems (NYSE: DVA) are partnering with EU labs to develop quantum computing for defense applications.

Risk Factors to Consider

• Geopolitical Volatility: Russia's aggression or U.S.-China tensions could disrupt supply chains.
• Budget Overruns: Defense projects often face cost overruns, though the EU's “common procurement” rules aim to mitigate this.
• Trade Disputes: The EU's 65% local-content rule could strain Canada-EU relations if not managed carefully.

Conclusion: A Long-Term Play with Near-Term Catalysts

The EU-Canada defense pact is a structural shift, not a temporary boom. With NATO's spending targets and the ReArm Europe plan's fiscal commitment, this is a multiyear theme. Investors should prioritize:

1. ETF Exposure: The iShares Global Aerospace & Defense ETF (NYSE: ITA) offers diversified exposure to firms like Boeing, Airbus, and CAE.
2. Sector-Specific Plays: Cybersecurity and materials stocks have asymmetric upside.
3. Geographic Diversification: Canadian firms like CAE and Hexcel are undervalued relative to their EU peers.

The geopolitical risks—Russia's actions, U.S. unpredictability—are too material to ignore. Defense equities are not just a hedge; they're a growth story.

Act now: Allocate 5-7% of a portfolio to defense stocks before the SAFE program's first procurement deals are announced in late 2025. The next five years will see a transatlantic defense renaissance—and investors who move early will reap the rewards.