Without acknowledging Eisen, Mahbubani continues: “It was Donald Trump that got us the ceasefire in Gaza after a long time, and it’s Donald Trump trying to get a ceasefire in Ukraine. If he pushes for the stoppage or elimination of wars, I would say that’s a positive contribution from Donald Trump.”
If Trump’s objectives are puzzling, his methods of attaining them are even more bewildering.
The tempestuous US leader has repeatedly criticised members of Nato for not spending at least 2% of their GDP on defence — a pledge made in 2014. This is not new; Trump had questioned the value of Nato in his first term, even suggesting in 2018 that members should double their 2% spending target.
See also: Trump brings European wineries to their knees even before tariffs hit
Western spending on defence has been much lower than in Russia, which spends 5.86% of its GDP a year on defence.
The EU spent 2% of its GDP on defence in 2024, compared to 3.4% in the US. Of the 31 Nato members, eight still do not meet the 2% guidelines, with Spain spending only 1.28% and Italy 1.49%. Belgium, where Nato’s headquarters are located, spends just 1.3%.
But things took a turn for the worse on Feb 28, when Trump and his Vice-President JD Vance met Ukraine President Volodymyr Zelensky in the Oval Office. The ensuing shouting match was televised live to the world.
See also: Trump open to tariff negotiations, will hit drug imports ‘soon’
Following the meeting, Trump halted military aid to allied Ukraine for about a week. Though this was later resumed, Europe’s leaders had already voiced support for Zelensky and ratcheted defence spending to top priority.
The Europeans are beginning to realise that they have to develop their own options, says Mahbubani. “To put it very bluntly, they’ve been slapped in the face by the US.”
Europe could be “left out in the cold”, says fellow panellist David Adelman, the US ambassador to Singapore during the Obama administration. “This is really the first time in the 80 years since the end of World War Two that the American in the White House has turned a shoulder — not completely turned its back — but turned a shoulder to Europe. It’s very new, and European capitals are still trying to figure this out.”
Readiness 2030
The panel at the Converge Live summit in Singapore was held on March 13. Since then, the EU has announced a new strategy to reduce its dependence on the US by purchasing more defence equipment within Europe.
Launching the “Readiness 2030” plan on March 19, President of the European Commission Ursula von der Leyen says “the era of the peace dividend is long gone”. “The security architecture that we relied on can no longer be taken for granted. Europe is ready to step up. We must invest in defence, strengthen our capabilities and take a proactive approach to security.”
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The EU’s rearmament plan enables spending of over EUR800 billion ($1.154 trillion) in total. This includes a EUR150 billion loan programme to help interested member states “rapidly and substantially” increase their defence investments.
Amid von der Leyen’s call to “buy more European”, this Security Action for Europe (SAFE) loan programme excludes weapons manufacturers from the UK, the US and Turkey, unless those governments sign security agreements with the EU. In 2023, 70% of military purchases by EU states were made outside the bloc, with the US accounting for over 60%.
“What we invest in defence is how we value our defence,” says European Commission Vice-President Kaja Kallas, “and for the past few decades, we haven’t put a high enough price on it. We must spend more.”
In a roundabout way, Trump appears to have succeeded: the EU is finally invested in raising their defence spending. His next mission, it seems, would be to put US arms manufacturers on Europe’s radar — perhaps by any means necessary.
Trump has yet to spend 100 days in office — that day will come on April 30. His gambit this term, however, appears to involve an “unblocking” strategy to deal-making, suggests former UK prime minister David Cameron.
Speaking at CNBC’s conference right before Mahbubani and Adelman, Cameron says Trump is using “quite startling” language, and many awkward and difficult things have been said.
“Through his actions — whether on tariffs, Ukraine or perhaps on the Middle East — the activity and the action are unblocking situations in a way that will be long-term beneficial,” says Cameron, who led the UK from 2010 to 2016. “If that’s the case, great; we need that, and we should make the most of it.”
Tech adjacencies
This week’s cover story is the first of a two-part series; Part 2 will be published in the following issue of The Edge Singapore. This feature revisits — for the third year running — the investibility of defence stocks around the world.
See also:
- From 2024: The ethics of investing in defence stocks
- From 2023: The arms bazaar remains bustling amid another flare-up
Just like how the importance of defence spending is now unequivocal to the EU, investors cannot ignore the allure of investing in defence stocks any longer.
Fuelled by geopolitical tensions and growing orderbooks, listed defence companies have seen their counters soar in recent months.
The market began pricing in the geopolitical uncertainty of a Trump presidency from as early as his campaigning days. Shares in Nasdaq-listed Palantir Technologies, which declined over 2022, began creeping up in 2023. Palantir stock then rallied with gusto from Nov 5, 2024 — the day of the US presidential election.
Over the past year, Palantir’s share price has nearly tripled, surging some 270%. Year to date, it has climbed 22%.
But some have argued that these defence companies are not singular war plays; most firms also have strong tech units with significant revenue contribution.
At a Palantir roadshow on Feb 13, the company showcased how smaller defence firms are using its artificial intelligence (AI) tools.
While the company has long provided data analytics services to governments, Palantir has increasingly sold these services to commercial firms.
In FY2024 ended Dec 31, 2024, Palantir’s US commercial revenue surged 54% y-o-y to US$702 million ($939.02 million), closing in on its US government revenue, which grew 30% y-o-y to US$1.20 billion. For the current FY2025, analysts think Palantir’s commercial revenue could overtake its government revenue.
Singapore’s sole listed defence play is similarly looking for more even revenue contribution among its three business units.
ST Engineering unveiled its five-year targets on March 18, outlining FY2029 revenue goals of above $7.5 billion from its defence and public security (DPS) segment, $6.0 billion from its commercial aerospace (CA) segment and $4.5 billion from its smart city solutions, which span the DPS and urban solutions and satellite communications (USS) segments.
The biggest undertaking will come from the USS segment; for FY2024, ST Engineering recorded $4.9 billion in revenue from the DPS segment (representing 44% of total revenue), $4.4 billion from the CA segment (39%) and $2.0 billion from the USS segment (17%).
To bolster its urban solutions business, ST Engineering acquired US-based transportation technology company TransCore Partners and TLP Holdings (collectively TransCore) for US$2.68 billion in 2021 — its biggest purchase thus far.
TransCore had been contracted to deliver a congestion pricing project in parts of Manhattan, New York, which began operating on Jan 5. However, Trump has clashed with the Metropolitan Transportation Authority (MTA), and US Transportation Secretary Sean Duffy wants the US$9 peak hour toll removed before April 21.
ST Engineering has also faced other challenges. In February, a TransCore competitor that lost a US$1.7 billion order from the New Jersey Turnpike Authority accused ST Engineering’s majority shareholder Temasek of having ties to the Chinese Communist Party.
At ST Engineering’s investor day on March 18, CEO Vincent Chong said the accusations were just a competitor’s attempts at “fearmongering”. “There’s no truth in that… We have a national security agreement that was signed with the authorities that requires us to protect data such that no foreign entities can access [it]. That process is regularly audited to ensure compliance.”
In a subsequent interview with The Edge Singapore, Chong says geopolitical challenges are typical of business operations. “The most important thing for us is that we continue to deliver value to our customers. [The] value proposition is strong [and] execution is strong. That creates a lot of goodwill and gives us a moat against our competitors’ actions. I think we’ll continue to effectively deal with them as they come.”
Despite political obstacles, the US is still “a very good market” for TransCore and the tolling business, says Chong, and the group is not yet looking overseas. “Outside the US, of course, the potential is huge because of the continued urbanisation of cities, which will require smart mobility solutions [and] tolling or congestion pricing. I think in the years ahead, there will be more opportunities for us to address.”
Between the two sub-segments of USS, urban solutions is still dominant, with a 5% y-o-y rise in revenue to $1.71 billion in FY2024. Conversely, the satellite communications (satcom) segment saw revenue fall 14% y-o-y to $300 million.
Chong says management is focused on turning around the satcom business, and the long-term prospects remain positive. “There will be more use cases. The world will be more connected than before. We think that satellite communication will become more and more mainstream [and] complementary to 5G terrestrial communication networks, especially in remote places, or in the air and maritime mobility domains.”
Do no harm?
Investing in defence is not without its complications, chief among them ethical considerations. Just last year, The Edge Singapore compiled expert opinions on whether investing in so-called “sin stocks” like defence or gambling is a wise decision.
Read the full cover story on “sin stocks” from Issue 1144 of The Edge Singapore, published in June 2024:
If sustainable investing has indeed become embedded in the mainstream, as many in the sector would have you believe, defence would be an awkward fit in many portfolios. But with national security rising to top priority for many countries, that has not been the case.
As ST Engineering’s chief puts it: “If you’re able to defend yourself and your citizens, is that not sustainable?”
The EU’s rapid rearmament is smashing not only the status quo, but also the region’s pioneering sustainability commitments. Modern-day environmental, social and governance (ESG) investing styles trace their history to a simple ethos: do no harm. But the world today, as leaders and weapons-makers see it, is not so absolute.
Current geopolitical events are reshaping the traditional ESG stance on defence stocks, say Morningstar Equity Research analysts Loredana Muharremi, Nicolas Owens and Andrea Burigana.
Investors are shifting from “exclusion” — or simply shunning defence names — to “recognising their strategic importance in safeguarding a free society”, add the analysts.
Morningstar’s 77-page thematic report, released in January, concludes with a sobering chart titled “Defence companies’ recent returns outpace global market and global sustainability benchmarks”.
In the three years till Sept 30, 2024, the Morningstar Global Aerospace and Defence Index returned 56.4%.
Europe’s sustainability professionals have drawn a line in the sand between “conventional” defence like aircraft, vehicles, ships, engines, electronics and cybersecurity; and “controversial weapons” like cluster munitions and white phosphorus.
Amundi — Europe’s largest asset manager — sees no issue with investing in conventional defence. Such stocks are even included in the investment universe of Amundi’s ESG funds, says chief investment officer Vincent Mortier.
Speaking to the media at last year’s Amundi World Investment Forum in June 2024, Mortier says the French asset manager does not exclude by sector. “We believe that each sector has a role to play. We try to find in each sector the companies [that] are doing better, the best, compared to others; it’s a best-in-class approach [that is] sector-neutral.”
This stance meant Amundi’s funds did not underperform indices when the war in Ukraine broke out, he adds. “It’s not a political view to say that arms are good; it’s a realistic view… Defence is part of sovereignty and as a result, because it is for the good of the people, defence should be considered an ESG investment.”
The announced military disengagement of the US signals the beginning of a new era where Europe must take responsibility for its own security, “something it is not yet fully prepared to do”, write a team of experts from the Amundi Investment Institute.
In 2024, Europe spent 2% of its GDP on defence but it must now rapidly strengthen its military capabilities, they add in a March 14 research note. “It is worth noting that in the 1960s, despite being protected by the US military umbrella, Europe spent between 3%–4% of its GDP on defence.”
Responsible vs sustainable
Robeco’s head of sustainable investing Carola van Lamoen has a more nuanced view on how investors should approach defence.
Her firm separates exclusions into the uninvestible “level one” — which includes chemical, biological and nuclear weapons — and the bespoke “level two” — where military contractors are excluded above certain revenue thresholds.
“Our most sustainable investment strategy range does not invest in defence because we do not define weapons as sustainable investment,” Van Lamoen says in a recent report. “In other words: investing in defence can be responsible, but not sustainable.”
Robeco’s mainstream strategies, however, can invest in the defence industry, excluding only controversial weapons.
“At Robeco, we acknowledge the changing geopolitical landscape and the increasing responsibility of European governments for the continent’s defence. This shift also comes with greater investments in the defence sector,” says van Lamoen.
Just like how van Lamoen delineates “responsible” investing, Insead’s Professor Theo Vermaelen believes the ESG industry has to accept a “broader definition of sustainability”.
“Call it existential sustainability,” says the professor of finance and UBS chair in investment banking. “This term is also used by environmentalists who believe that if we don’t fight climate change, we won’t exist. But we also won’t exist if we don’t protect ourselves against war and people like Vladimir Putin.”
The EU should go one step further and exempt defence companies from ESG regulation and disclosure rules, says Vermaelen to The Edge Singapore. “We don’t want defence companies to worry about the carbon footprint of their tanks.”
According to Morningstar, defence companies have a significant impact on the environment, with equipment production and fossil fuel-dependent operations contributing more than 5% of global emissions.
After years of being “lukewarm” to threats like a Russian invasion or the US quitting Nato, Europe is finally in “large consensus” to invest in defence, says Vermaelen, who is based in France.
“Already, in 2018, Trump told the Europeans he will pull out of Nato unless they spend more on defence. This time, they take the threat more seriously because they are more concerned about Putin now than in 2018 and they are more convinced that Trump may not support Europe unconditionally. So, overall the recent events have been a good thing,” he adds.
Indeed, the market seems to expect more disruption to come; one telltale sign is how the US and Europe bond markets have decoupled.
“Hard-form decoupling” between European and US swap spreads is unusual, says Steven Major, HSBC’s global head of fixed income research.
This accelerated in the lead-up to the US presidential election in November 2024. “When it happens, a paradigm shift might be afoot,” says Major of the swap spreads.
“From a European standpoint, a similar shift in issuance expectations occurred in 2020 with the arrival of the EU as a major issuer. The catalyst back then was a massive economic shock that came with the Covid-19 pandemic, leading to calls for a coordinated fiscal response. Five years later, a different kind of shock, this time from a need for Europe to shore up its defences, is resulting in similar calls for action,” writes Major.
Brinksmanship may jitter the markets, but any warmongering is initiated by politicians and not weapons manufacturers, says Vermaelen. “Of course every company cheers when demand for its product goes up but I don’t think you can blame weapons manufacturers for increasing the chances for conflict. Defence is not a deterrent if your opponents don’t believe you will use the weapons.”
Positioning for defence
Earlier in March, Germany scrapped its so-called “debt brake”, a mechanism enshrined in its constitution that limits government borrowing, allowing for greater expenditures on defence, cybersecurity, intelligence and civil protection. The loosened borrowing limits mean spending in excess of 1% of Germany’s GDP can now be financed with new debt.
The move could ultimately result in an additional EUR1 trillion of spending on defence and infrastructure over the next 12 years, says Ronald Temple, chief market strategist at Lazard.
Building a military-industrial complex in Europe will take time, Temple adds, but the benefits of these reforms could be felt “within a few months”.
This comes as underutilised auto factories are converted to munitions production and as governments begin signing long-term procurement contracts for weapons produced in Europe.
Rheinmetall, Europe’s top munitions manufacturer, announced in February plans to repurpose two of its automotive plants in Germany to produce defence equipment.
The weapons giant has been ramping up capacity. In June 2024, German auto parts manufacturer Continental signed a memorandum of understanding with Rheinmetall to retrain workers from the shrinking auto industry. In lieu of layoffs, Continental is facilitating the transfer of its workers in Germany to Rheinmetall.
Manpower aside, Lazard’s Temple highlights the “ancillary benefits” of military spending over the long term, such as technological innovation that can accelerate growth in the private sector. “It is important to remember that some of the most important innovations in the US were either directly or indirectly attributable to Pentagon spending, [such as] GPS navigation.”
Singapore’s Defence Minister Ng Eng Hen mentions this conundrum in a recent speech. “This difficult tension with new discoveries — new technology, on the one hand, improving our lives, while on the other, potentially causing harm — is a recurrent theme in the progress of mankind.”
Speaking at the Singapore Defence Technology Summit 2025 on March 18, Ng says “this dilemma of progress versus peril stays with us”. “I doubt if it will ever cease.”
The fifth edition of the summit welcomed 100 officials from 40 countries over three days. Organised by the Defence Science and Technology Agency, the summit is a platform for discussions on safeguards to ensure the responsible use of defence technology, says Ng.
The hesitant investor could consider buying into “non-lethal support industries” as tensions rise, says Robeco.
“Napoleon once said that ‘an army marches on its stomach’, meaning opportunities in catering and the related companies supplying troops. Investors can also look for high-end military uniform suppliers, logistics firms, satellite technology or banks providing loans to any of them,” says Robeco on these peripheral sectors.
Modern warfare also necessitates cybersecurity, adds the firm. “We are trying to square a natural reluctance to invest in defence, due to its inherent association with unsustainable and undesirable conflicts, with the fact that we are multi-asset investors,” says Aliki Rouffiac, portfolio manager with Robeco Sustainable Multi-Asset Solutions. “We want to balance the trade-off between risk, return and sustainability when it comes to defence spending.”
The ReArm Europe plan means massive new investment to safeguard the security of the region, adds Rouffiac. This means the weight of the aerospace and defence sectors will grow in global indices, she adds.
The electronics sector, for example, boasts “extensive” cross-platform diversification and “significant dual-use opportunities”, say Morningstar’s analysts. “Major companies in this sector are not solely focused on military electronics but have diversified interests across different sectors, which helps them mitigate risk and stabilise revenue.”
The electronics sector also exhibits a low dependence on defence contracts compared to other areas, like naval or land systems, due to the “significant” dual-use potential of electronic products in civilian and military applications, they add. “In Europe, defence revenues account for only 50% of the electronic segment revenues, while in the US, they account for around 40%.”
Asia steps up defence spend
Trump is focused on not just Europe, but also Asia’s defence spending. Elbridge Colby, the nominee for US Under-Secretary of Defence for Policy, reiterated this at a Senate confirmation hearing in early March, saying Japan should spend at least 3% of its GDP on defence.
Defence spending increases are planned already, but new US demands may be challenging for some economies to fulfil, write a team of Morgan Stanley analysts led by chief Asia economist Chetan Ahya.
“All three economies of Japan, [South] Korea and Taiwan have already put in plans to step up defence spending over the coming years,” say Ahya and team. “From a public finance perspective, Korea and Taiwan would have more room for increasing defence spending compared with Japan, given a lower public debt to GDP ratio at the starting point. However, there are economy-specific challenges that will be hurdles to raising defence spending to the levels asked for by the US.”
In Japan, policymakers have set a goal of increasing defence spending to 2% of GDP by fiscal year 2027, up from 1.4% currently.
Prime Minister Shigeru Ishiba has pushed back on further increases in defence spending by stating: “Japan decides its defence budget by itself, it should not be decided based on what other nations tell it to do.”
South Korea’s government has set its defence budget at 2.3% of GDP for 2025. However, Morgan Stanley’s chief Korea economist Kathleen Oh believes additional spending in the near term will be “constrained” as domestic politics have intensified and delayed political schedules.
Oh now sees “limited chance” of a fiscal boost from any supplementary budget package. In the mid-term defence blueprint for 2024–2028 announced in December 2023, South Korea’s Defence Ministry planned to increase the annual defence budget by 7% per annum from 2024 to 2028, with annual spending eventually increasing to KRW80 trillion or around $73 million (estimated at 2.7% of GDP) by 2028.
Finally, Taiwanese policymakers have budgeted 2.5% of GDP in defence spending for 2025, up from 2.4% in 2024.
While President Lai Ching-te has pledged to propose a special budget to increase defence spending to 3% this year, opposition parties who have a majority in Parliament pushed through substantial spending cuts and freezes in January. They will have the authority to vote to decide whether to pass Lai’s proposed special budget.
Increased overall defence spending is one way for Asia to reduce its trade surplus with the US. As it is, Japan, South Korea and Taiwan are already importing 86%–98% of their arms from the US, according to Morgan Stanley. “Hence, an increase in defence spending will likely reflect in more defence-related imports for the US.”
For other economies in the region, such as China, India and Indonesia, the share of the US in their defence imports is “much lower”, add analysts, so there is scope to redirect purchases from other economies to the US.
Private wealth undecided
In 2H2024, UOB Private Bank highlighted rising military spending in Europe as a developing macro theme. Head of investment strategy Kelly Chia says the bank remains constructive on defence stocks “though episodic pullbacks can be expected”.
Speaking to The Edge Singapore, he believes the sector is “overbought in the near term”. “At the moment, defence stocks are very crowded trades and are trading at very high valuations. In the past, post-war periods have seen defence budgets scale down and defence stocks suffering. With large budgets, there could be a large overbuild of capacity that may not be used if demand falls,” says Chia, who joined UOB Private Bank in December 2024 after 13 years at Julius Baer.
Another overlooked problem is inflation, where long-dated defence programmes can incur large cost overruns from the time the contracts were signed, Chia adds. Sentiments may also swing negative with “conflict fatigue”, or if the public makes accusations of “war profiteering”.
UOB Private Bank’s investment advisors and discretionary portfolio managers are allowed to invest in defence stocks unless there are specific exclusions in bespoke mandates.
That said, these high-net-worth clients are still on the fence. “Our clients have not actively engaged with us on investing in the defence theme so far, possibly due to a lack of familiarity with the defence companies,” says Chia. “However, we do expect more upcoming conversations with clients on the topic given that the German parliament has recently passed the historic debt brake change and fiscal package.”
Overall, investing in defence has historically proven to deliver positive returns over time, says Chia — “though it might not be a straight line”. “Investors should not underestimate [how] peace, politics or technological shifts can pull the rug from under them.”
Investing in large tech firms with cybersecurity businesses could be one way for investors to diversify their portfolio, says Chia. “For the time being, the world does appear to be more volatile, violent and vulnerable, so investors would take heed to ‘play defence’. At the end of the day, security is still needed for sustainable growth.”
Photos and infographics: CNBC/Screengrab, Albert Chua/The Edge Singapore, Insead, Robeco, UOB Private Bank, ST Engineering, Morningstar, Morgan Stanley
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