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Why is European rearmament a theme investors cannot ignore?
Russia’s full-scale invasion of Ukraine in February 2022 ended Europe’s ‘peace dividend’. In March 2025, the European Commission published its White Paper for European Defence – Readiness 2030, the framework for the ReArm Europe plan and the clearest statement yet of a ‘once-in-a-generation surge’ in defence investment, with the explicit aim of a credible European defence position by 2030. The numbers behind it are large: a new joint borrowing instrument, Security Action for Europe (SAFE), worth up to €150bn in EU-backed loans; a national escape clause from EU fiscal rules that lets members spend an extra 1.5% of GDP, worth roughly €650bn over four years; and up to €800bn of defence investment in total, with further levers from the EU budget, the European Investment Bank and private capital.
National governments are rewriting their own fiscal rules to pay for it. Germany alone has loosened its constitutional ‘debt brake’ to allow effectively unlimited defence borrowing, on top of a €500bn fund aimed at strengthening military capabilities and infrastructure. NATO members have committed to a path towards 5% of GDP by 2035. Russia spent an estimated 40% of its federal budget and up to 9% of GDP on defence in 2024 and, in purchasing-power terms, is expected to outspend all EU members combined in 2025. Unlike most investment themes, this one does not depend on a product catching on or a cycle turning; it rests on a security commitment that governments have already made in law and in their budgets.
Why look beyond the major primes?
The obvious winners, including BAE Systems, Rheinmetall, Leonardo and Thales, have already re-rated sharply, and their order books are visible to everyone. The less crowded opportunity sits one or two tiers down, among the suppliers of components, sub-systems, consumables and services the primes and armed forces depend on. The European Commission’s White Paper points straight at them. It targets 65% of new equipment sourced from the EU, Norway or Ukraine, and it leans heavily on aggregating demand and collaborative procurement (building on a long-standing 35% collaborative-procurement target) to give ‘multi-year industrial demand’ and the predictability to invest in capacity. The White Paper also lays bare how much catching up is needed: Europe fields 179 different major weapons systems against just 33 in the US, and much of the kit is obsolete, with around half of land systems having entered service before 1990. Replenishing depleted stocks and closing these gaps means years of re-equipping, ammunition and sustainment work that flows disproportionately to specialist suppliers rather than to the platform primes.
Where are the capability gaps, and who fills them?
The White Paper names seven priority areas: air and missile defence; artillery systems; ammunition and missiles; drones and counter-drone systems; military mobility; AI, quantum, cyber and electronic warfare; and strategic enablers and critical-infrastructure protection. Several UK and European small- and mid-cap companies map directly onto that list. Theon International* (AEX: THEON, c €2.65bn) is a leading European maker of night-vision and thermal-imaging optronics for soldier and platform systems, sold across 71 countries. It is broadening from man-portable night vision into platform optronics and counter-drone systems (including a strategic tie-up with Rheinmetall), and targets more than €1bn of revenue by 2029, framing the opportunity as the ‘reindustrialisation of Europe’ rather than simply rearmament. Chemring (LSE: CHG, c £1.4bn) makes countermeasures, energetics and sensors for missile defence and electronic warfare, while MS International (LSE: MSI, c £0.3bn) makes naval gun systems and defence forgings used in shells and barrels. MS International sits squarely in the ammunition build-out the European Commission is prioritising, with a stated objective of 2m large-calibre rounds a year for Ukraine alone. Cohort (AIM: CHRT, c £0.6bn) supplies defence electronics, communications and naval sonar; QinetiQ (LSE: QQ, c £2.3bn) provides test, evaluation, robotics and electronic-warfare expertise; and Babcock (LSE: BAB, c £4.9bn) sustains the UK Royal Navy’s fleet and is rebuilding munitions capacity. On the chemical, biological, radiological and nuclear (CBRN) and CBRN detection and protection side, Avon Technologies (LSE: AVON, c £0.5bn) supplies respiratory and CBRN protection, while Kromek (AIM: KMK, c £70m) makes radiation and bio-detection used in counter-CBRN work.
What about the picks-and-shovels, mobility and services layers?
Rearmament is not only about hardware. The White Paper devotes whole sections to military mobility, citing four priority cross-border corridors with some 500 ‘hot-spot’ infrastructure projects (bridges, tunnels, ports) to be upgraded for dual use and an Eastern Border Shield combining physical barriers with modern surveillance. That has a direct read-across for the services and infrastructure tier. Serco (LSE: SRP, c £2.7bn) runs defence training, base support and logistics across the UK and internationally; Synectics (AIM: SNX, c £0.1bn) supplies advanced surveillance and security systems for critical infrastructure and defence sites; and Babcock and QinetiQ feature again, because a substantial part of any defence budget is spent not on buying platforms but on keeping them running, modernising them and training the people who operate them. This sustainment layer tends to deliver steadier, longer-duration revenue than one-off equipment orders, precisely the recurring, cash-generative work that suits the lower-profile companies beneath the primes.
What are the risks investors should keep in mind?
Three cautions stand out. First, timing: budgets are announced quickly but convert into firm orders slowly, order intake can be lumpy, and Europe’s fragmented procurement can delay the cash that headlines promise. Second, valuation: the sector has already re-rated on the rearmament narrative, so a good story is partly in the price and any disappointment on order phasing can hurt. Third, politics and capacity: budgets can be cut as easily as raised, and supply chains face genuine bottlenecks in skilled labour and energetics development. However, one traditional headwind is easing. The European Commission’s Defence Omnibus explicitly aims to remove obstacles to defence financing, ‘including ESG investment’, which over time should widen the pool of institutional buyers for these names. The opportunity is structural and well-funded, but it rewards selectivity below the primes rather than indiscriminate exposure to ‘defence’.
Edison insight
Europe has decided, in law and in budget, to rearm. The European Commission’s White Paper for European Defence – Readiness 2030 frames up to €800bn of investment, a €150bn SAFE loan facility and a national escape clause worth c €650bn, on top of Germany’s €500bn fund and a NATO path towards 5% of GDP by 2035. Most of the attention, and most of the re-rating, has gone to the primes. The more interesting question for investors is who sits beneath them. Seven named priority gaps, a ‘buy European’ sourcing rule, an explicit push to aggregate demand into multi-year orders and a drive to replenish ammunition and harden infrastructure will funnel years of work towards specialist small- and mid-cap suppliers in optronics, countermeasures, electronics, naval systems, protection, detection, mobility and defence services. The theme is unusually durable because it is based on a security commitment rather than an economic cycle, but it is not a one-way bet: order timing, stretched valuations and political risk all argue for picking names carefully rather than buying the label.
Megatrends: sovereign security and defence, deglobalisation and reshoring, supply chain resilience, disruptive technologies, automation and industrial innovation
*Theon International is a research client of Edison Investment Research.
Note: Market capitalisations are approximate as at mid-June 2026.
Severfield is a cyclical recovery play at a trough valuation, with fresh management, a refinanced balance sheet and a fast-growing, under-appreciated Indian business.
