MW Why Europe may be the best place to bet on defense stocks
By Nora Redmond
According to Citigroup, Europe and the U.K. have a higher exposure to defense than the U.S.
Defense stocks have the potential to become structural assets in an investment portfolio - and Europe may be the best place to take advantage, according to a strategist at Citigroup.
Beata Manthey, head of European equity strategy at the New York-headquartered bank, said defense companies could start to be used as core structural assets if conflicts around the world continue to escalate. Increasing exposure has previously helped investors to hedge against geopolitical risk, but there may be a shift coming.
Defense companies have had a stellar few years. Shares in German giant Rheinmetall (XE:RHM) have risen more than 400% since the start of 2024, while shares in the UK's Babcock (UK:BAB) have climbed 200%.
"Investors have been saying it all, 'it's just a one-off,' it's going to go away,'" Manthey told MarketWatch. "All of the events that have been happening since last year, and accelerating this year, tells us that the need for defence is not going away. If anything, sadly, it's getting stronger."
Since the U.S. and Israel first started striking Iran on Feb. 28, many defense stocks have spiked as investors anticipate an increase in demand for weaponry.
A number of European countries have also committed to upping their defense budgets since Russia started its invasion of Ukraine in 2022. In 2025, NATO members agreed to increase defense spending to 5% of gross domestic product by 2035, and already Poland has raised its budget to about 4.8% of GDP - surpassing the U.S.
Demand for defense is not going away anytime soon, Beata Manthey, head of European equity strategy at Citigroup, said.
According to Citigroup, Europe has a disproportionately large exposure to defense companies. In the U.S., the sector accounts for between about 2% of the S&P 500 SPX, whereas the defense weighting in Europe's Stoxx 600 index XX:SXXP is between 4% and 6%. In the U.K., the aerospace and defense sector occupies about 10% of the FTSE 100 UK:UKX due to BAE Systems (UK:BA).
"The push for defense is not going away from a geopolitical standpoint," Manthey said, adding that a lot of the manufacturing required for the industry will be happening in Europe.
As a sector, Manthey pointed out that defense was also one of the first adopters of AI. In a note published on Monday, a team of strategists led by Mathey wrote that while Europe has been underrepresented in the overall AI debate, it now stands to gain from actually adopting the technology, while companies responsible for the development of AI face growing concerns over high valuations.
She said this represents a "double whammy" - in a positive sense - for many parts of the market in Europe. Companies have participated in the buildout of AI, producing parts of the supply chain, like ASML $(ASML)$ making extreme ultraviolet lithography machines used for semiconductor chips. Now, she said, sectors like industrials and manufacturing will benefit from the productivity gains which come from its application.
Since the war in Iran has started, Citigroup has lifted the U.K. from underweight to overweight, driven by its share of commodities and the defense sector.
Manthey described that U.K.'s main index as "the most defensive" in the world, with over half of its weighting in defensive sectors, like healthcare and utilities, a large defense allocation, and a lot of exposure to oil.
"Investors have been very bullish on the FTSE getting into this conflict, also on the backs of very strong banks performance," she explained. But Manthey added that if the conflict continues, it could stand to perform as a better hedge going forward.
-Nora Redmond
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
March 18, 2026 07:44 ET (11:44 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
Comments