Recent discussions between Trump's foreign policy team and European officials have revealed plans to potentially increase NATO defence spending requirements to 5% of GDP, more than doubling the current 2% target. This development comes amid ongoing geopolitical tensions and shifting defense priorities among NATO allies.
Market Impact and Investment Implications
Hector McNeil, Co-Founder and Co-CEO of HANetf, provides his analysis on these developments and their implications for defense sector investments:
"It is no secret that the U.S. president-elect, Donald Trump, is dissatisfied by NATO members’ defence spending. On the campaign trail, he frequently suggested that the U.S. would no longer tolerate members looking for a free ride, and even threatened to pull out of the alliance if Europe didn’t pay its fair share.”
"For years, the U.S. accounted for the lion’s share of NATO’s defence spending, and many of the alliance’s members have trailed the outlined 2%-of-GDP target. While an increasingly tumultuous geopolitical landscape has seen a partial reversal of this – with 23 of the 32 members now meeting or exceeding the target – Trump evidently believes this is still not enough.”
"Trump has now reportedly told European officials that NATO member defence spending should jump to 5% of GDP, more than double the current target. With Russia’s invasion of Ukraine showing no signs of slowing, and continued instability in the Middle East, it is not difficult to understand why.”
"Now, all eyes are on European NATO members. Sources claim the Trump would be satisfied with an increase to 3.5%, at least in the short-term, but it is a significant increase either way. The prospect of the U.S. abandoning the alliance is no doubt a cause for concern, and there may be no other choice than to meet the incoming President’s target. Either European NATO members spend more to keep the U.S. in the alliance, or they spend more to adapt to a world without the biggest spender in the alliance.”
"On 24th December, the leaders of Latvia, Estonia, and Finland urged the alliance’s members to heed the warning, claiming NATO is “not ready” to fight Russia without U.S. aid.”
"So, European NATO members may already be spending more on defence, but it seems they will have to spend much, much more.”
"While the shorter-term target of 3.5% still represents a steep increase, it is realistic and perhaps more achievable. European defence companies would likely be the prime beneficiaries, with many already upping their outputs in recent years:
- Rheinmetall (4.6% weighting in NATO ETF) recently secured a “mid-range double digit euro millions” contract with Ukraine to provide 155mm propellant charge modules to Ukraine.
- Palantir (7.62% weighting in NATO ETF) has agreed a $400.7 million contract to continue providing the U.S. Army with its AI-enabled Vantage system as the service’s main data platform
- BAE Systems (4.19% weighting in NATO ETF) has secured a $68 million contract with the U.S. Army to produce 44 additional Cold Weather All-Terrain Vehicles (CATVs).”
"Future of Defence UCITS ETF (ticker: NATO) aims to provide exposure to NATO and NATO+ ally defence and cyber defence spending. Uniquely, the defence ETF employs a “NATO screen”, limiting exposure to companies domiciled in NATO or NATO+ ally member states.”
"In this way, the ETF seeks to align with the values of investors who may have concerns about defence investing, but cannot ignore the current political climate, and therefore seek a smarter and more considered approach. NATO is a defensive alliance and itself states that “deterrence and defence is one of its core tasks” – focusing on companies operating in NATO allied countries limits the possibility of constituents of the ETF being companies operating in countries that could one day be adversaries to the alliance."
