European defence stocks have been the best-performing sector globally in 2026, with the STOXX Europe Aerospace & Defence index surging 35% year-to-date. The catalyst: a fundamental shift in European security doctrine that is driving the biggest defence spending increase since the Cold War.
The Catalyst: From 2% to 5% of GDP
The debate has shifted dramatically. NATO’s original target of 2% of GDP on defence (which most members failed to meet) has been superseded by discussions around 3-5% targets. The EU announced a €800 billion defence investment plan, while Germany approved a €500 billion special defence fund. This represents a structural shift, not a one-time stimulus.
Top Performing Defence Stocks
- Rheinmetall (Germany): +52% YTD. Europe’s largest ammunition maker. Order backlog at €55 billion (6x revenue). The company can’t produce shells fast enough — expanding capacity from 700,000 to 1.1 million rounds per year
- Leonardo (Italy): +38% YTD. Leading European defence electronics and helicopter manufacturer. Benefiting from Italian defence budget increase to 2.5% of GDP
- BAE Systems (UK): +28% YTD. Record order backlog of £77.8 billion. Nuclear submarine and AUKUS programs provide decade-long revenue visibility
- Saab (Sweden): +45% YTD. Gripen fighter jet and Carl-Gustaf weapons system seeing massive demand from NATO’s eastern members
India Connection: Dual Opportunity
India’s defence sector benefits from the global rearmament cycle in two ways:
Direct exports: India has signed defence export deals with Philippines (BrahMos missiles), Armenia (artillery), and several African nations. European demand for ammunition and components could benefit Indian manufacturers.
Technology transfer: As European companies ramp up production, they’re seeking manufacturing partnerships. HAL’s partnership with Safran (engines) and BEL’s collaboration with Thales (electronics) could accelerate technology transfer to India.
How Indian Investors Can Access This Theme
- Indian defence stocks: HAL, BEL, Bharat Dynamics (direct beneficiaries of global trend)
- International ETFs: ICICI Prudential US Bluechip Fund or Motilal Oswal S&P 500 Index Fund provide indirect exposure to US defence giants (Lockheed Martin, RTX, Northrop Grumman)
- European funds: Edelweiss Europe Dynamic Equity Fund captures the European defence rally