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Washington has made it clear that Europe needs to defend itself. For some investors, that’s a call to load up on defence stocks.

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Security-related shares have been on a tear this year, with Germany’s Rheinmetall AG ranking as the best-performer in the MSCI World index as money managers anticipate a jump in military spending. The buzz has spilled over into Asia, where South Korea’s Hanwha Aerospace Co. and its unit Hanwha Ocean Co. have both rallied more than 100 per cent to beat all their regional peers.

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U.S. President Donald Trump’s shift in traditional security alliances is driving a new commitment to defence spending and training the spotlight on Asian contractors which are able to deliver weapons faster and cheaper than their rivals. The pivot to these shares first gained traction during the Russia-Ukraine war and Trump’s decision to pause military aid to Ukraine will reinforce the move.

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“Trump is saying if Russia is attacking you, we’re not protecting you — you are on your own,” said Keith Bortoluzzi, managing director at Impactfull Partners, an advisory firm for investment companies. It’s going to lead to “Europe having to ramp up their defence industry,” he said.

The European Union will propose extending the equivalent of US$158 billion in loans to boost defence spending, European Commission President Ursula von der Leyen said Tuesday. Germany will set up a nearly US$540 billion fund as part of a policy overhaul to tackle urgently-needed investments in defence, according to chancellor-in-waiting Friedrich Merz.

Against this backdrop, Rheinmetall’s shares have surged more than 80 per cent this year and reached a record of about US1,232 on Monday. They traded at less than US$108 before Russia invaded Ukraine.

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Similarly the stock of Hanwha Aerospace, South Korea’s leading defence contractor, hit a series of all-time highs in 2025 after more than doubling last year. Shipmaker Hanwha Ocean’s shares have climbed 115 per cent since end-December. The gains have added US$21 billion to the market value of the two stocks this year.

Trump’s move to pause aid to Ukraine set off another rally in Asia’s defence stocks, as traders weighed a pledge by Europe to support Ukraine with weaponry. In Japan, the shares of heavy machinery maker IHI Corp. jumped to the highest since 1990.

Alec Cutler, a Bermuda-based portfolio manager at Orbis Investments, has trimmed his exposure to European defence stocks following last month’s rally.

“If we have the European countries start balking at how much spending they need to do, the stocks could trade off significantly, and that could be an opportunity for us to come back in,” said Cutler.

He has pared exposure to European defence names including Saab AB and Rheinmetall and added to holdings in other firms such as Leonardo SpA.

Unsurprisingly, the blistering rally has left valuations looking stretched. Hanwha Ocean is trading at 49 times forward earnings, while Hanwha Aerospace and Rheinmetall have multiples of 20 and 37, respectively.

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Nevertheless, investors note that there are plenty of reasons for optimism, given the expected increase in security spending.

Trump’s nominee for Navy Secretary John Phelan plans to utilize allied shipyards’ capacity and technology, either as contracted manufacturers or as investors in U.S. facilities, according to a Bank of America Corp. research note. Hanwha Ocean is best positioned among Korean shipyards to secure contracts from the U.S. Navy, the bank said.

“The realization that the U.S. will no longer provide protection for free will prompt the rest of the European nation to increase the defence budget,” said Jung In Yun, chief executive officer at Fibonacci Asset Management Global Pte. “Also, the tension between the U.S. and China over Taiwan and potential military clashes in the sea can not be ruled out. All of this lays the ground for a much higher level of revenue for Korea defence stocks for coming years.”

—With assistance from Isolde MacDonogh and Youkyung Lee.

Bloomberg.com

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