How to profit from the new Cold War without getting burnt

With Europe rearming and the US being challenged for the first time in 50 years, investors need to be prepared for more volatility and the increasing danger of unforeseen events

between low military spending and high and rising geopolitical risk, concluding: “We live in dangerous times, but military budgets in the West have not responded to these developments.”

Russia and, more importantly, China never accepted US hegemony, seeing themselves as great powers. Encouraged by Europe’s reluctance to rearm and President Joe Biden’s weak leadership, the “anti-hegemonic” alliance led by China, continues to grow, now including not only Russia, Iran, and North Korea, but also Brazil and South Africa. Retired US army general and Hoover Institute Fellow HR McMaster recently noted: “The perception of weakness is provocative to this axis of aggressors.” need to spend 3.5pc of GDP on its military to match the US.

Equally important to the defence industry is how much of the budget is spent on hardware. The Nato average today is 30pc (up from just 10pc in 2014) but countries in the front line such as Finland and Poland are spending 50pc on equipment, which is likely to be the trend elsewhere going forward.

Brussels is determined for European nations to procure at least half of its hardware within the EU.

The entire annual revenues of the quoted European defence industry last year (including the UK) were just $132bn (£106bn). If the $375bn annual spend of Nato European nations increases from 1.75pc to 3pc of GDP and 50pc of this is spent on equipment exclusively sourced within Europe, then annual industry revenues will double.

After three decades of retrenchment, the biggest problem European defence companies have is ramping up manufacturing capabilities to meet demand. To encourage investment, governments are offering defence contractors longer contracts and better payment terms.

But with the Russian annual military budget now thought unofficially to be as high as $160bn (10pc of GDP), a UK defence industry executive told me recently: “Putin is on a war footing today, but we have problems getting planning permission.”

Over the past 30 years Western Europe has effectively disarmed, with its number of tanks down 80pc, fighter aircraft down 60pc, with a halving of naval ships and submarines.

Many European countries have already donated most of their ammunition and useful weapons to Ukraine. Nato is now recommending 30 days of battle inventory (previously five days) but the more urgent Ukrainian conflict has postponed Europe’s ability to rearm.

The nature of combat in Ukraine has demonstrated that the next war is always different, requiring new kit: tanks with 360-degree armour, given vulnerability to loitering munitions; mobile artillery as a more cost- effective solution than precision missiles, for example in defending against drone attacks.

German weaponsmith Rheinmetall, the global leader in the manufacture of