- Europe’s path towards strategic autonomy is opening new opportunities for bond investors across several sectors including defence, energy and technology
- Increased government spending and policy support are strengthening the outlook for many issuers in these key areas
- There is scope for diversification across sectors, regions and issuers, but investors should take a selective, bottom-up approach
The geopolitical landscape has undergone a significant shift in recent years, with global cooperation and multilateralism giving way to a more fragmented world.
Sovereignty and domestic resilience have become central to national policy agendas – not least for Europe, which needs to remain competitive and support its ‘social model’ – based on creating prosperity combined with protection and opportunities for its citizens.1
Europe is aiming to grow its economy while reducing its dependency on other nations and protecting itself against global threats and external shocks.
To achieve this, it is investing significantly across defence, infrastructure, technology, and improving its resilience across energy, industry, food and healthcare sectors. Policymakers are allocating unprecedented sums, both at a European Union and country level – all of which presents potentially attractive opportunities for fixed income investors.
Fresh funding
Based on our estimates, Europe plans to allocate more than €1.5 trillion in investments by 2035 to strengthen its autonomy.
This substantial funding encompasses, among other schemes, the Readiness 2030 defence budget, Germany’s €500 billion infrastructure fund, the European Chips Act, which seeks to double Europe’s share in semiconductor manufacturing, and the Critical Raw Materials Act, to ensure access to a secure and sustainable supply of raw materials.
These schemes, and others, will be partly funded via bond issuance, opening potential opportunities for fixed income investors. They will offer scope for issuer and maturity diversification across specific targeted issuance from dedicated government agencies, supranational agencies and corporate bonds.
In addition, increased government spending on strategic sectors could potentially bolster issuers’ creditworthiness, via stable cash flows, strong order books and supportive regulatory environments.
European resilience
The most important pillar, in our view, of European strategic autonomy is infrastructure resilience, particularly across digital, energy, communications. If supply of a service or product comes from a single supplier, from a single-entry point, this leaves it vulnerable to disruption. A more resilient, autonomous Europe will rely instead on multiple sources and entry points across an interconnected European network.
As such, infrastructure investments are integral to Europe’s strategic goals. Such projects are likely to benefit from stable, often regulated cash flows, and should be supported by long-term government funding and policy commitments.
The continent is already a major agricultural producer and exporter, but threats to food security from extreme weather and geopolitical disruption cannot be ignored. Alongside the EU’s long-standing Common Agricultural Policy, which counts among its main objectives enhancing food security, increasing competitiveness and sustainability2 there are specific policies like the Fertiliser Action Plan which targets pollution reduction and cutting Europe’s dependence on imports.3
Key sectors to potentially benefit
Defence is one of the key elements of Europe’s goal of strategic autonomy. Military spending is projected to reach 2.5% of European GDP (an increase of 0.6 percentage points in two years) and exceed the previous 2% of GDP NATO target in over three-quarters of EU member states.4
Companies involved in defence manufacturing and related areas could benefit from long-term government contracts and strategic backing, offering a potentially more predictable credit environment.
Energy independence and resource security also present potential opportunities. European policies like REPowerEU – a roadmap to phase out Russian energy imports – and the Critical Raw Materials Act aim to diversify supply sources and develop domestic capabilities in renewable energy, critical minerals, and energy infrastructure.
As such bonds issued by companies engaged in solar, wind, energy storage, and raw material processing could benefit from these policies, alongside declining costs, and increasing demand.
Technology is another key pillar of European strategic autonomy, and the thread that runs throughout other sectors, from electricity grids to military applications as well as communications, AI and cybersecurity.
The CHIPS act is aimed at both increasing the bloc’s competitiveness and reducing the potential for supply chain disruption while Europe is also investing heavily in datacentres and gigafactories.
Meanwhile bond issuance from large tech companies has reached record levels as they look to fund their AI capex, with many of the larger players turning to markets outside of the US to raise capital.
A nuanced approach
While the European Commission is pursuing autonomy for the bloc as a whole, individual European countries are finding benefits in working together.
The recent wildfires in France and Spain are one example of this co-operation across the EU; countries ranging from Germany and Portugal to Slovakia and Croatia helped tackle the blaze and support the evacuation of people.
Cross-border infrastructure projects, joint ventures, and technology transfer initiatives are also gaining traction, spreading geopolitical risks and fostering resilience. For fixed income investors, bonds issued by regional entities or companies involved in such collaborations could potentially offer diversification benefits and exposure to new areas of growth.
However, against a backdrop of ongoing geopolitical tensions and rapid technological change, fixed income investors must adopt a nuanced approach.
Notably, companies and sectors receiving government support may face increased scrutiny and be vulnerable to policy changes or budget reallocations, creating an element of credit risk.
As such, we believe that a fundamental, bottom-up approach combined with rigorous credit analysis, scenario planning, and stress testing are essential to navigate the uncertainties.
[1] European social fairness – European Commission
[2] CAP funds – Agriculture and rural development – European Commission
[3] Europe’s plan to boost fertiliser supply and food security – European Commission
[4] Readiness 2030: one year after its announcement, the European rearmament plan is on track
