Taking aim with European defense stocks

Recent geopolitical conflict in Europe has prompted many nations there to fortify their military capability, thereby boosting growth prospects for companies that can arm them with the necessary equipment, says Fidelity's Allyson Ke.

• Since Russia's invasion of Ukraine in 2022, countries across Europe have looked to build a stronger and more self-sufficient military, according to Fidelity Portfolio Manager Allyson Ke, who considers this a compelling opportunity to invest in certain Europe-based defense-related companies, which she believes could be bolstered by the European Union's industrial strategy and prospects for increased fiscal spending.
• "EU member nations have arguably underinvested for decades historically," contends Ke, who manages Fidelity^® Nordic Fund. "They spent around 1.8% of gross domestic product on defense in 2024, or just over $300 billion annually. But with political will and changes in policy, we expect the EU may significantly increase this amount, with forecasts hitting 3% of GDP by 2035.
• Ke says some countries within the bloc could see even higher levels of spending, including Germany, where recent fiscal reforms under the new government coalition could push defense outlays to 3.5% of GDP a decade from now. In addition, Sweden is expected to boost defense spending to 3.5% of GDP by 2030, up from an estimated 2.4% in 2025.
• And EU leaders are focused on deploying much of this new capital within European borders, according to Ke. "While a large portion of the defense equipment acquired by member countries has historically come from U.S.-based arms makers, the EU's newest industrial strategy is looking to have its members spend at least half of their defense budgets on local suppliers by 2030, and 60% by 2035," says Ke.
• In managing the regional equity strategy, Ke invests primarily in the stocks of Danish, Finnish, Norwegian and Swedish issuers and other investments that are tied economically to the Nordic region. Her investment philosophy focuses on companies she believes can structurally grow earnings throughout the business cycle and potentially generate good, sustainable returns exceeding the cost of capital. She favors underappreciated, higher-growth and return businesses trading below their fair value.
• "Given the strong secular tailwind for European defense, we've emphasized local providers of ammunition supplies and intelligence, surveillance, and reconnaissance capabilities," she says.
• Specifically, Ke has positioned the fund with sizable positions in Norway-based Kongsberg Gruppen and Sweden's Saab.
• "Kongsberg is a high-quality defense and industrial company that provides on-deck marine equipment, as well as electronics and communications technology for ships," Ke says. "The company also has an emerging software business aimed at helping companies manage large-scale marine installations more efficiently."
• Ke notes that Kongsberg has recently benefited from European nations bolstering their military capabilities, as demand for the company's defense products, including naval missiles, began to outpace supply, creating a backlog and pipeline of new orders and leading to solid visibility on Kongsberg's revenue outlook.
• Saab offers electronic warfare, airborne solutions, fighter aircraft and weapons systems, according to Ke, who believes the company may benefit from the same trends.
• "These two companies supply the defense industry with products that will be vital to bolstering Europe's defense strategy in the coming years," she concludes.

Securities mentioned were fund holdings as of March 31.