European Aerospace and Defence I

Background

I have started a (free) substack with the sole purpose of trying to organise my sometimes chaotic thoughts (Alastair Kendall | Substack) and hopefully simplify my portfolio and process, so I can spend more time with my family, horses and fishing. I find myself focussing on areas where I feel I have a competence and interest - Defence & Aerospace, Space, Chemistry, Engineering and Real Assets (Copper, Uranium, silver, platinum and the great debasement trade - gold). I also manage money for a small family office and whilst I prefer individual shares in my own portfolio, I have made extensive use of ETFs and Investment Trusts with family money. It was a shock to me to strip out the ETFs recently and find the annual performance last year of that "sub-portfolio" of ETFs was 62.5% It makes you wonder if the more important decision is allocation to themes rather than identifying individual shares.  I know that will be anathema to the Stocko community and am looking closely at my individual share performance against the sector/theme ETF and acting accordingly. 

In over 40 years of investing, I cannot recall a time when geopolitics had such am impact on global capital flows, supply chains and investing. I believe we can no longer ignore geopolitics in investing and much of my thinking is driven by such considerations.  I will start with the opportunities in the European Aerospace and Defence sector.

Thesis

NATO is dying and the only question is will the Americans give the Europeans sufficient space and time to develop alternative structures to secure the future of European security. In truth, the Europeans have been complacent, only too ready to rely on the American blue collar tax dollar to fund our security, whilst successive European and UK governments have created the largest social welfare programme since the Romans used to Colosseum to distract and control the hoi polloi.

NATO was established on April 4, 1949 with the signing of the North Atlantic Treaty in Washington, DC with the objective of providing collective defence against aggression from the Soviet Union. Europe lay in ruins after a brutal war and was only too happy to shelter under Uncle Sam’s economic, industrial and military might. The first NATO Secretary General, Lord Hastings Lionel Ismay summed the geopolitical reality a little more bluntly stating that:

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“NATO was designed to keep the Americans in, the Soviets out, and the Germans down”

In those days, America’s moral leadership was not in doubt, whereas now, many European politicians and senior military officers question the US’s moral direction under the Trump administration and America’s continued commitment to NATO and article 5. It is not yet clear to what extent America will retreat behind its borders; nor the extent to which America remains committed to article 5 and European security.

Matthew Whitaker, the U.S. ambassador to NATO recently said that a German should lead NATO. He made the remark at the Berlin Security Conference in November 2025, suggesting that Germany should eventually take over the role of Supreme Allied Commander Europe (SACEUR) — a position traditionally held by an American since NATO’s founding.

What has become abundantly clear is the need for European countries and the UK to step up to the plate and take control of their own sovereignty, command and control systems within NATO, and to invest in the lethality and competence of their own militaries which have suffered from years of political neglect. After a decade of failing to meet the 2% of GDP target, Europe has collectively underspent by an estimated €850bn. However, The Europeans are rapidly catching up:

NATO’s official 2024 estimates, compiled by the Atlantic Council and McKinsey (above).

The above graph above and summary table below was created by converting each European NATO country’s average forecast GDP out to 2030 and applying the forecast percent of GDP defence spending.

The source of the data is:

• IMF World Economic Outlook (Oct 2025) – GDP forecasts for each country.
• European Commission Country Forecasts (Nov 2025) – EU member state projections.
• National central banks (Bank of Lithuania, Latvijas Banka, Banco de España, Banque de France, Bundesbank, etc.) – supplemental projections.

The key observation are that

• Germany, UK, and France dominate the absolute increases, together accounting for ~65 bn of the total rise of 126.1 bn Euros.
• The CAGR from 2025 to 2030 is 5.5% which, given the threat, might be considered rather modest.
• Southern Europe (Spain, Italy) shows significant jumps despite starting from lower baselines.
• Eastern flank states (Poland, Romania, Baltics) rise sharply in relative terms, but their absolute euro contributions are smaller.
• Belgium has one of the steepest proportional climbs, though from a low base.

A NATO without America

If the Americans leave partially or wholly, I believe NATO will fracture as it has become quite obvious we do not all share the same values and are not willing to contribute to the same extent:

NATO without the U.S. would not collapse overnight, but it would split into tiers:

• Tier 1: UK, France, Germany—capable of leading but divided on strategy.
• Tier 2: Eastern front-line states—demanding stronger deterrence, possibly drifting toward bilateral pacts.
• Tier 3: Southern members—resistant to higher spending, more focused on Mediterranean security.

The result: a weaker, fragmented alliance, still militarily formidable but politically incoherent, vulnerable to Russian pressure and internal disputes.

Likely Fracture Dynamics

• UK-led JEF/CJF: Britain would leverage its nuclear arsenal, expeditionary tradition, and Nordic/Baltic trust networks. The CJF (UK–France) is already being scaled into a corps-level force, potentially offering NATO a “strategic reserve”. Without the U.S., this could become the de facto Western European pillar. The UK-led JEF membership consists of the UK, Sweden, Finland, Norway, Denmark, Iceland, Estonia, Latvia, Lithuania, and the Netherlands. Canada might join.
• Bucharest Nine: The Bucharest 9 has become the political voice of NATO’s eastern flank, pushing for higher defence spending (up to 5% of GDP in recent pledges) and stronger forward presence. If U.S. guarantees vanish, the B9 could harden into a military bloc, possibly coordinating nuclear guarantees with France/UK. Membership of the Bucharest nine consists of Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania and Slovakia. It is led by Poland.
• Southern Bloc: Mediterranean states may resist massive spending hikes and prioritize naval/migration issues. This could dilute cohesion further. The Spanish, Portuguese and Italians have varying degrees of commitment to investment in NATO and Ukraine.
• Ad hoc coalitions: Europe has a tradition of “coalitions of the willing” (e.g., Gulf War, Libya). Without U.S. leadership, these flexible formats could proliferate, but they risk duplication and inefficiency.

Strategic Implications

• Fragmentation is almost certain. NATO’s command coherence would erode, replaced by overlapping coalitions.
• Deterrence credibility would split. Eastern states would rely on B9 solidarity, while Western powers (UK–France) would try to project nuclear-backed leadership.
• Industrial inefficiency. Competing blocs would duplicate procurement and logistics, weakening Europe’s ability to sustain long wars.
• Political divergence. France/Germany may push for an EU defence union, while Poland/Baltics resist dilution of Russia focus. The UK and Nordic countries have deliberately excluded Germany and France from JEF to avoid EU politics and French posturing.
  • Not in JEF: The UK‑led JEF is Northern‑Baltic focused, expeditionary, and deliberately excludes France/Germany to avoid EU politics.
  • Not in B9: The Bucharest Nine is Eastern‑flank focused, highly Russia‑centric, and sceptical of Franco‑German compromise.
  • Instead: France and Germany would likely push for an EU Defence Union or “European pillar,” trying to consolidate southern and western members (Italy, Spain, Greece, Belgium, etc.) under their leadership.

French / German Military Co-operation

An EU Defence Union will only come about if led by France and there are serious questions as to whether or not a more assertive Germany will permit this. The Germans (Airbus) and the French (Dassault) have already fallen out publicly over the allocation of work under the 5th generation FCAS fighter jet project, whilst Spain’s Indra Sistemas looks on with considerable bemusement. There have been problems with:

• Persistent disputes between Dassault and Airbus over design authority and workshare.
• France wants a lighter carrier‑capable jet (~15 tons), Germany prefers a heavier air‑superiority design (~18 tons).
• Rising costs (estimated €100 billion+) and delays — demonstrator flight now unlikely before 2028–2029.
• German lawmakers have recently called for withdrawal, citing fears of being treated as a junior partner

Where to Invest?

Rump NATO (ex-USA) has an urgent need to raise investment in Ukraine and in their own military lethality after years of atrophy, lack of political interest or leadership, and a careless reliance on American blue collar taxpayers whilst running the largest social welfare benefits programme in the World. Europe’s politicians have finally realised the cold winds of political reality are upon them and they must act at a time when European treasuries are empty.

The European NATO countries need to focus on the investment in the core strategic enablers which the Americans have always been very careful to control in the past.

There are other issues to resolve including where Ukraine fits into a new fragmented European Defence posture (join B9?); how France and the UK share the nuclear deterrent and associated costs (Germany has already offered to help fund the UK’s deterrent; and, the extent to which European nations specialise, coordinate their industrial bases, and ultimately fund all of this.

There are other questions. There must surely be questions about how independent of America the UK’s nuclear deterrent really is. Aldermaston, where the UK’s nuclear warheads are maintained, had American management involvement through Lockheed Martin and Jacob’s Engineering (now Jacob’s Solutions inc.) up to July 2021, but the facility is now 100% under the control of the UK Ministry of Defence via the Atomic Weapons Establishment (AWE). The Trident ballistic missile delivery system however is rented from, and maintained by, the Americans.

There is also a strategic question where Canada and the UK sit given Trump’s stated objective of bringing both countries into their sphere of influence and prising the UK in particular from the political embrace of Europe. Meanwhile, the Canadians are showing every sign of getting closer to Europe and diversifying their geopolitical posture.

The UK has several world-class aerospace and defence companies. Babcock Engineering (LSE: BAB) is building the new general purpose modular type 31 frigate (£250 to £320 million a pop) at their yard in Rosyth; BAE (LSE: BA.) is building multiple type 26 anti submarine frigates (£1.3 billion a pop) on the Clyde and the BAE-led 5th generation Typhoon fighter jet with Italy and Japan is progressing according to plan in marked contrast to the political travails of the French-German-Spanish FCAS programme which is bogged down in work allocation arguments. There are also several small cap opportunities such as Chemring (LSE: CHG), Cohort (LSE: CHRT), MS International (LSE: MSI) as well as many other small cap companies with some defence exposure such as Goodwin (LSE: GDWN).

Or, you could just buy the HAN European Defence ETF (LSE: ARMY) to gain exposure to European’s finest including Rheinmetall, Leonardo, Dassault and SAAB.

The next article will focus on the structure of the HAN European Defence RTF (LSE: ARMY) and any ETF competitors. Subsequent articles will focus on an analysis of the strategic position of some of the key UK and European aerospace and defence companies and returns we might expect over the next 5 years.

The author holds shares in the HAN European Defence ETF, Cohort, Chemring, Rolls Royce, Melrose Industries, Babcock Engineering, Kongsberg Gruppen and in SAAB through an investment in Swedish holding company, Investor AB.