Quarterly Outlook
Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?
John J. Hardy
Global Head of Macro Strategy
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Rheinmetall: The Nvidia of defence?
Charu Chanana
Chief Investment Strategist
Key points:
- Germany’s 'whatever it takes' defence shift: Berlin has moved beyond its fiscal conservatism days, committing to sustained military spending growth in 2025 and beyond, with Rheinmetall at the center of this transformation.
- Defence supercycle and structural growth: With rising European defence budgets, NATO’s rearmament, and Rheinmetall’s expansion in high-margin ammunition and battlefield tech, the company presents one of the strongest investment cases in global defence markets.
- Key risks to watch: Despite strong tailwinds, investors should consider risks such as valuation concerns, fiscal constraints in Europe, geopolitical volatility, and the cyclical nature of government defence spending.
A new era for European defence
The global security landscape has changed dramatically over the last few years. Russia’s invasion of Ukraine has not only revived geopolitical risk in Europe but also accelerated a long-overdue rearmament cycle across NATO countries. Germany, long known for its restrained military posture, has now adopted a 'whatever it takes' approach to defence in 2025, committing to sustained investment well beyond the initial €100 billion fund.
At the center of this shift is Rheinmetall AG, Germany’s largest defence company and one of NATO’s most critical suppliers. The company has evolved from a low-profile industrial player into a strategic powerhouse, scaling production, securing long-term contracts, and expanding its footprint across Europe and beyond.
A legacy of strength: What Rheinmetall does
Founded in 1889, Rheinmetall is a German defence and automotive company with a growing reputation as one of NATO’s most critical suppliers. While it maintains a civilian business, the defence division is driving the company’s growth and valuation.
Rheinmetall is:
- the leading NATO supplier of 155mm artillery shells
- a producer of tanks, air defence systems, and autonomous military vehicles
- a growing player in electronic warfare and AI-enabled battlefield systems
In many ways, Rheinmetall today occupies a position in defence markets that is increasingly being compared to Nvidia’s dominance in AI. Both are at the heart of their respective global megatrends. Both are racing to meet demand that far exceeds prior expectations. And both are enjoying rapid revenue growth, margin expansion, and outsized investor interest.
But as compelling as the comparison may be, the differences also matter—and investors should weigh both the opportunity and the risk.
The outlook: A defence supercycle in full swing
The geopolitical environment has triggered a fundamental re-rating of defence equities, particularly in Europe. Rheinmetall is a direct beneficiary of multiple converging trends:
Soaring demand and orders
- Ammunition boom: Rheinmetall’s annual production of artillery shells has increased tenfold and is expected to reach 1.1 million rounds by 2027, up from 750,000 today.
- New facilities: The company is expanding production capabilities across Germany, Lithuania, Romania, and Ukraine to meet regional demand.
- Landmark contracts: In 2024, Rheinmetall secured an €8.5 billion artillery contract with the German government, one of the largest in its history.
- Backlog strength: The company’s order book now exceeds €30 billion, reflecting multi-year revenue visibility.
Evolving product mix
Beyond traditional hardware, Rheinmetall is investing in:
- Drone and counter-drone systems
- AI-powered battlefield software
- Mobile air defence solutions
This positions the company to benefit from both conventional rearmament and long-term defence technology transformation.
Financial performance
Rheinmetall’s financial profile supports its strong operating outlook:
- 2024 revenues grew 36%, reaching €9.75 billion. Company expects 25-30% sales growth in 2025.
- The ammunition division posted a 28.4% operating margin, significantly above industry averages.
- Rheinmetall, in its recent presentation, said that it could potentially capture 20-25% of NATO Europe’s equipment spending through to 2030. The company also sees significant opportunities to help re-arm Ukraine after a peace deal is reached.
Parallels with Nvidia
Like Nvidia in the AI space, Rheinmetall is:
- Scaling production at breakneck speed to meet surging global demand
- Benefiting from structural, long-term tailwinds (in this case, rearmament and geopolitical fragmentation)
- Enjoying a dominant market share and strong pricing power
- Attracting strong analyst upgrades and institutional investor interest
Despite the useful parallels, the Nvidia analogy has its limits, because:
- Nvidia is a tech company with high growth multiples; Rheinmetall is industrial/defence, with different risk profiles.
- Nvidia benefits from private-sector tech adoption, whereas Rheinmetall relies on government contracts.
- Defence is more politically sensitive and faces ESG headwinds.
Why investors should pay attention
- A structural opportunity: Defence spending in Europe is no longer cyclical—it’s becoming structural. NATO countries are reshoring production, replenishing stockpiles, and reducing reliance on non-European suppliers. Rheinmetall’s manufacturing scale and deep integration with NATO make it a long-term beneficiary.
- Geopolitical diversification: Europe’s military build-up presents a diversified opportunity. Rheinmetall offers exposure to EU fiscal expansion, defence modernization, and strategic autonomy.
- Government-backed demand: With long-term government contracts and clear political will, Rheinmetall has the kind of revenue visibility that few industrials can match.
- Potential Euro Stoxx 50 inclusion: Steady market cap growth could push Rheinmetall to be large enough to be included in the Euro Stoxx 50 index within this year, triggering passive fund flows and increased institutional buying.
How to gain exposure
- Direct equity: Rheinmetall AG (RHM.DE) is listed on the Frankfurt Stock Exchange.
- Peer exposure: For broader diversification within defence:
- BAE Systems (UK)
- Thales (France)
- Saab (Sweden)
- Airbus Defence & Space (Germany/France)
- Saxo’s Defence Theme Basket offers curated access to global defence and aerospace equities, including Rheinmetall and its peers.
- ETF options: Investors preferring an ETF route can consider:
- Xtrackers DAX UCITS ETF – includes Rheinmetall and broad German exposure.
- Future of Defence UCITS ETF (NATO) – global defence exposure.
- Amundi Stoxx Europe 600 Industrials – industrials with defence overlap.
Valuation concerns
Rheinmetall’s price-to-earnings (P/E) ratio has risen sharply to 60x as defense spending surges and investor interest grows.
But it may be worth noting that Nvidia’s P/E soared above 200+ in July 2023 as shown in the chart below, yet the stock still delivered over 170% gains in the following year to July 2024, showing that high valuations do not always limit future returns.
However, there are risks. Unlike Nvidia, which trades at premium multiples due to its growth potential, Rheinmetall is not a high-growth stock but rather a cyclical industrial player benefiting from sustained defense demand. Rheinmetall also operates in a fundamentally different industry, where earnings depend on government contracts rather than private sector innovation.
Other risks to consider
Despite strong fundamentals and tailwinds, investors should be mindful of the following risks:
- Economic challenges: Many European countries face fiscal constraints, and balancing increased defense budgets with social spending might slow the growth trajectory.
- Competitive and capacity risk: A surge in global defence production could lead to overcapacity in a few years, increasing competitive pressure and affecting margins.
- Budget dependence: The company relies heavily on government contracts, which are subject to political shifts, fiscal pressures, and election cycles.
- Geopolitical volatility: Ironically, the very geopolitical events that drive defence demand can also cause market volatility and uncertainty. A sudden de-escalation in conflicts—or an unexpected shift in alliances—can significantly alter demand forecasts.
- Cost and technology pressures: Like Nvidia, Rheinmetall operates in a sector where rapid technological advancement and cost management are critical. As the defence industry shifts toward more automated, digital, and AI-integrated systems, companies must continually invest to stay ahead. At the same time, scaling production amid rising input costs and supply chain bottlenecks could pressure margins.
- Regulatory and ethical constraints: Rheinmetall operates in a sector under constant ESG scrutiny, which could affect investor demand and trigger restrictions on institutional ownership. Export controls or shifting arms regulations may also impact its business.
- Valuation sensitivity: Following a sharp stock re-rating, valuation multiples are elevated. Future performance will depend on the company’s ability to meet aggressive growth and margin expectations.
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