The war between Russia and Ukraine is prompting European asset managers to reconsider defence stocks, partly at the urging of their clients.
Belfius Asset Management (Belfius AM) has avoided investments in the weapons and defence sectors for years. The same is true for most standard products offered by its industry peers. Until recently, weapons manufacturers had a reputation comparable to that of tobacco producers and gambling companies.
However, the war in Ukraine and the growing calls for stronger European defence are eroding the taboo surrounding weapons and defence companies. Public support for increased military investment appears to be growing across Europe. The recent escalation of the Russia-Ukraine conflict has only added momentum to this shift.
“This topic resonates with our clients, as well as with European authorities,” said Maud Reinalter, Chief Investment Officer of Belfius AM, in an interview with Investment Officer. “At Belfius, we recognise the importance and challenges, particularly in light of statements made by then-President-elect Donald Trump regarding NATO. Within the bank, we are asking ourselves: how can we contribute to Europe’s defence?”
Investment policy
This change in sentiment could lead to adjustments in investment policies. Belfius AM is currently analysing whether to integrate defence stocks into its portfolios. “But no decisions have been made yet,” emphasised Reinalter. “We are still studying this internally.” Other asset managers have also confirmed that the issue is under discussion, though they acknowledge its complexity.
“The first question is whether or not to invest in defence stocks. Then, to what extent? What should we allow? What should we exclude? What would be reasonable to include in terms of portfolio management?” Reinalter outlined the contours of the debate.
Fund managers generally rule out companies producing highly controversial weapons such as anti-personnel mines, cluster bombs, or nuclear, biological, and chemical weapons. Beyond that, the decision-making becomes far less straightforward. For instance, there is a strong case for investing in companies that produce defensive systems, such as anti-aircraft technology. But what if the same companies also manufacture offensive weapons?
Financial perspective
The changing attitude of clients towards defence stocks is also driven by financial considerations, Reinalter pointed out. Since Russia’s invasion of Ukraine over a thousand days ago, the share price of German tank manufacturer Rheinmetall has increased almost sixfold, reaching over 600 euro.
“The defence sector, which has recently outperformed some market indices, could contribute to the overall performance of investment funds in the future. That is the reasoning investors are starting to adopt,” said the CIO.
A long-term trend?
In the past, it was often argued that the revenues of arms manufacturers were too unpredictable, influenced heavily by geopolitical fluctuations. As such, their absence from traditional investment funds was not considered a significant issue for investors.
The pressing question for asset managers today is whether Europe is on the brink of a paradigm shift towards structurally higher defence spending.
Several military experts in Europe are already calling for significant increases after decades of budget cuts. One frequently cited example is Belgium, which, despite hosting NATO headquarters, European institutions, and the geopolitically significant Port of Antwerp, has minimal air defence capabilities.
Should European nations collectively decide to significantly and structurally increase their military budgets, defence companies could benefit from a stable stream of orders lasting decades. Such a transformation in the defence sector would be difficult for asset managers to ignore.