European defense & cybersecurity investments: the structural case for portfolio allocation in 2026
18 MAY, 2026
By Christian Rouquerol from Tikehau Capital
By Ana Gomes from Novo Banco
Institutional investors are reshaping their portfolios around European defense and cybersecurity in 2026 – not as a speculative bet, but as a structurally grounded, multi-decade allocation. Driven by escalating geopolitical tensions, surging government spending commitments, and a meaningful shift in ESG regulatory frameworks, defense has moved from the margins to the mainstream of institutional strategy. This article examines why, and how to approach allocation selectively.
Why defense is no longer a niche allocation
For years, institutional investors treated the defense and cybersecurity sectors with hesitation, sidelining them due to strict environmental, social, and governance (ESG) frameworks. That calculus has fundamentally changed. Today, defense is no longer viewed through a purely tactical or cyclical lens – it has emerged as a structurally essential, multi-decade allocation tied to sovereignty and economic resilience.
What does modern defense investing actually cover?
The modern definition of defense has evolved far beyond traditional hardware. While military transport and equipment remain foundational, the sector now intersects heavily with cutting-edge technology, infrastructure protection, and digital sovereignty.
As Ana Gomes, Senior Investment Advisor & Fund Selector at Novobanco, explains: "The modern concept of defence goes far beyond spending on missiles, fighter jets or troops. Investing in defence now means investing in technology, cyber and space security, energy and other critical infrastructure."
Investors evaluating this space should consider four interconnected verticals:
Traditional (hard) defense: Systems, equipment, aerospace, and naval technology — heavily reliant on state procurement cycles.
Cybersecurity & digital defense: Firewalls, encryption, and threat detection safeguarding critical state and corporate networks.
Resilience & dual-use technology: Semiconductors, AI applications, drones, and geospatial satellites serving both civilian and military purposes.
The space economy: Secure satellite communications and space-based infrastructure critical to modern defense capability.
EU defense spending: the scale of capital being deployed
Unlike discretionary technology sectors, defense spending is heavily insulated from the standard economic business cycle. It is driven by multi-year, treaty-backed state commitments and public procurement cycles that span decades – offering contractors highly predictable revenue visibility and significant barriers to entry for new competitors.
The numbers reflect this structural commitment at scale. Christian Rouquerol, Managing Director and Co-Head of Iberia at Tikehau Capital, highlights the momentum: Between 2021 and 2024, total defence spending by European Union member states increased by more than 30%. In 2024, it reached an estimated €326 billion – around 1.9% of EU GDP – and is expected to increase by more than €100 billion in real terms by 2027.
For institutional allocators, this level of capital deployment signals durable demand and a prolonged investment runway rarely seen outside sovereign-backed infrastructure.
Why cybersecurity is now a core defense investment theme
A central pillar of any defense investment strategy is digital security. As geopolitical tensions increasingly spill into the digital realm – through state-sponsored cyber operations and AI-driven infrastructure attacks – digital protection has transitioned from an optional IT upgrade to an absolute strategic necessity.
Margarida Isabel Ribeiro, Investment Advisor at Millennium bcp, frames the long-term, non-cyclical nature of the opportunity: Cybersecurity is starting to look like a long-term growth area, not a short-term fix. Unlike optional technology upgrades, spending on cybersecurity is becoming essential.
From a portfolio construction standpoint, this resilience is particularly compelling. Alessandro Greppi, Financial Consultant, Allianz Bank Financial Advisors, underscores the durability: Even in a slowing economic environment, cybersecurity budgets are the last to be cut. From a fund selection perspective, that earnings resilience is precisely what long-dated liabilities demand.
How ESG frameworks are evolving for defense funds in Europe
One of the most significant catalysts driving institutional capital into European defense is the pragmatic evolution of ESG regulation. Historically excluded by many sustainable portfolios, European regulatory bodies are increasingly viewing security capability as a prerequisite for social stability – not a contradiction to it.
Recent clarifications from the European Commission mean that defense-related exposures are no longer automatically deemed incompatible with sustainable finance frameworks. This has cleared the path for certain Article 8 and Article 9 funds to participate in non-controversial defense opportunities – a development that meaningfully expands the addressable investor base.
Key risks when investing in European defense stocks and funds
While the structural growth trajectory is clear, investing in defense requires deep sector specialization and disciplined active management. Investors should account for several specific risks:
Regulatory & export restrictions: Defense companies face stringent government oversight regarding permissible buyers and geographies — constraints that can materially impact revenue potential.
Valuation risks: Elevated investor interest in "hot" sub-themes has pushed valuations for certain pure-play companies to demanding multiples. Entry point discipline matters.
Execution and labor shortages: A shortage of specialized engineering and cybersecurity personnel continues to drive up labor costs and can limit growth execution, particularly for smaller-cap players.tainable portfolios, European regulatory bodies are increasingly viewing security as a prerequisite for social stability.
Recent clarifications from the European Commission mean that defense-related exposures are no longer automatically deemed incompatible with sustainable finance frameworks, clearing the path for certain Article 8 and Article 9 funds to participate in non-controversial defense opportunities.
Summary for Portfolios
Ultimately, the thesis for entering this market is built on structural permanence rather than short-term opportunism. As Alessandro Greppi concludes: In 2026, thematic exposure to defence and cybersecurity is not a speculative bet. It is a structurally grounded allocation, backed by government balance sheets and driven by needs that will not disappear.
For modern diversified portfolios, the question is no longer whether to look at European defense, but how to selectively allocate within it.
__________
This article is for informational purposes only and does not constitute financial advice.
