The European defense sector is emerging as a notable growth area amid escalating military budgets within the region, according to evaluations by Morgan Stanley analysts. Although gains have already been realized in recent years, these stocks present further upside given the prospect of increased defense spending, with some countries aiming to allocate as much as 3% of their GDP to defense — a 140-240% escalation in equipment expenditures.
Morgan Stanley's curated portfolio of leading European defense shares has delivered performance far ahead of the wider market. Since 2021, these top picks have outpaced the MSCI Europe index by 118 percentage points when weighted by free float market capitalization. This momentum continued over the past year with an outperformance of 16.7 percentage points. Cumulatively, the total return of these companies has reached an extraordinary 177% since 2021, including a 38% gain in the most recent 12-month period and an additional 4% in the last month alone.
Topping the list of standout contributors is Airbus, a global aerospace and defense powerhouse that benefits from a dual business model encompassing commercial aircraft as well as growing defense operations. With European governments boosting military budgets, Airbus is strategically positioned to secure a range of defense contracts across various platforms, such as military aircraft, helicopters, and space systems. Its well-established footprint across multiple European markets enhances its competitiveness for domestic defense deals. Recent notable orders for Airbus include a significant contract involving 60 A320neo jets with Air China and an agreement for 340 satellites from Eutelsat aimed at expanding the OneWeb network. However, operational concerns remain, notably related to delays in Pratt & Whitney engine deliveries for the A320neo family.
Another key player, Rheinmetall, a German defense manufacturer, has capitalized on surging defense investments within Germany and broader Europe amid geopolitical shifts. Specializing in ground defense systems — including land vehicles, ammunition, and armaments — Rheinmetall has seen a rapid growth of its order backlog, aligning tightly with regional military modernization initiatives. Recent strategic decisions include divesting its civilian business to sharpen focus on military activities. Additionally, Rheinmetall has forged a long-term framework agreement with Hensoldt for radar system supplies crucial for air defense operations.
Morgan Stanley's November investor survey underscores that visibility on earnings upgrades, driven by fresh order intake and explicit company guidance, remains a critical factor attracting investor interest in European defense shares. Given the expectation of sustained elevated defense spending in the region over the coming years, these featured companies are positioned to continue their growth trajectories.