NATO's Defense Spending Surge: Where to Invest in Europe's Military Buildup

The NATO alliance's decision to raise defense spending to 5% of GDP by 2035 marks a historic shift in European military preparedness. With geopolitical tensions at post-Cold War highs and Russia's invasion of Ukraine reshaping priorities, this commitment opens compelling investment opportunities in defense-related sectors. Two nations—Greece and Germany—are positioned as key beneficiaries due to their explicit multi-year modernization plans, while investors should exercise caution in lagging members like Spain. Below, we analyze the investment landscape across defense contractors, cybersecurity firms, and critical minerals suppliers.

Greece: Modernization on Fast Forward

Greece's defense spending already exceeds 3% of GDP and is set to grow further. Its $28 billion 12-year defense modernization plan, announced in 2023, prioritizes drones, satellite systems, and air defense capabilities. Key areas of investment include:
- Aerospace & Electronics: Contracts for advanced fighter jets (e.g., F-35s), unmanned aerial vehicles (UAVs), and radar systems.
- Cybersecurity: Enhancing defense against hybrid threats, including Russian cyberattacks.

Investors should track companies like Epirus Defense Solutions (a U.S. firm supplying advanced radar tech) and Saab (a Swedish company with Greek drone contracts). Hellenic Aerospace Industry (HAI), Greece's state-owned aerospace firm, may also benefit through partnerships with global players.

Germany: Scaling Up Despite Challenges

Germany's defense spending surged to 2.1% of GDP in 2024—the first time since reunification it met NATO's 2% threshold—but achieving 5% by 2035 will require sustained effort. Key areas include:
- Modernization of Armed Forces: Replacing outdated equipment, such as upgrading tanks and fighter jets.
- Cyber Resilience: Building capabilities to counter state-sponsored cyberattacks.

Rheinmetall, a German defense contractor, is a prime beneficiary, with contracts for armored vehicles and artillery systems. Airbus Defence & Space also stands to gain through projects like the Eurodrone program. However, investors should note that Germany's 2024 spending relied partly on a temporary defense fund, raising concerns about long-term fiscal sustainability.

Sectors to Watch

Defense Contractors

The 5% target directly benefits companies supplying military hardware. Prioritize firms with contracts in high-spending nations:
- European Defense Giants: Leonardo (Italy), Thales (France), and BAE Systems (UK) are well-positioned to secure deals in Greece, Germany, and Eastern Europe.
- U.S. Partners: Lockheed Martin (F-35s) and Raytheon Technologies (missile systems) may see increased European demand.

Cybersecurity Firms

The 1.5% of GDP allocated to “security-related infrastructure” includes cybersecurity, critical infrastructure protection, and intelligence. Key picks:
- Nordic firms: F-Secure (Finland) and Cloudfare (with European data centers).
- Global players: Palo Alto Networks and CrowdStrike, which are expanding NATO-focused solutions.

Critical Minerals Suppliers

Defense tech relies on rare earth elements (e.g., neodymium for missiles) and advanced materials. Investors should consider:
- Rare earth miners: Lynas Corporation (Australia) and Alkane Resources (Australia).
- Cobalt & Lithium: Glencore (cobalt) and SQM (lithium), critical for military electronics and drones.

Caution: Spain and the Lagging South

Spain's defense spending lags at 1.3% of GDP, and its government has openly opposed the 5% target, calling it “unreasonable.” Prime Minister Sánchez has argued that 2.1% suffices to meet core NATO requirements. This reluctance, combined with fiscal constraints and domestic prioritization of social spending, suggests limited upside for local defense firms like Navantia (shipbuilder) or Indra (tech). Investors should avoid overexposure to Spain's defense sector.

Investment Risks

• Political Volatility: Defense budgets could shrink if governments face economic downturns or shifting priorities.
• Procurement Delays: Complex procurement processes in EU nations often lead to cost overruns and delays.
• Overcapacity: A surge in demand might strain global supply chains for critical components.

Bottom Line

NATO's 5% spending target creates a multi-year tailwind for defense and cybersecurity firms with exposure to Greece, Germany, and Eastern Europe. Investors should favor companies with long-term contracts, technological differentiation, and exposure to NATO's priority areas (e.g., drones, cybersecurity). Meanwhile, Spain's reluctance underscores the importance of geographic diversification within the defense sector.

For now, the smart money is on Leonardo, Rheinmetall, and critical minerals plays—provided investors remain vigilant about execution risks. The NATO buildup is a geopolitical megatrend, but not all nations (or companies) will benefit equally.