By JAMES CHENEVIX-TRENCH
“If you want peace, prepare for war.”
Seismic historical events that change the world are relatively rare. This writer (being 34 years old) can speak to five: 911, the 2008 banking crisis, the Covid pandemic, Russia’s more recent invasion of Ukraine and the re-election of Donald Trump. The world changing nature of the first three is up for debate, but in my mind the impact of the last two in changing the course of history are undeniable. As Gramsci famously wrote during his incarceration under Mussolini’s regime “The old world is dying, and the new world struggles to be born: now is the time of monsters.”
Today, as a consequence of these events, we are entering a new world, politically, socially and economically. When Russian armour crossed into Ukraine from three directions, the results of Europe’s complacent security posture became obvious to everyone. Europe was not prepared to defend itself, and so Russia decided to wage war. The invasion exposed gaping vulnerabilities created by thirty years of underinvestment and strategic naivety. Against all odds and the expectations of the west, Ukraine did not immediately collapse in the face of that invasion and mounted a fierce defence. This gave the then US president Joe Biden time to plug the gap in European defence by incrementally pledging vital military aid to Ukraine. This situation continued for almost three years until the election of Donald Trump ended any prospects for future US support of Kyiv, with the White House now sympathetic to Putin’s position on the war. All this has triggered a paradigm shift in Defence spending, especially in Europe in what Goldman Sachs calls a new “defence super cycle” – right now a profound rethinking of what it means to invest responsibly in the modern world is underway. The Cerno Future Strategy seeks to invest in technologies that will define the future of warfare with a focus on the shift in European defence spending.
Why defence, and why now?
Source: McKinsey, ‘The Military Balance’, 2022. Countries include France, Germany, Italy, Netherlands, Norway, Poland, Spain, Turkey and UK.
Europe’s “peace dividend” – €1.8 trillion saved by falling short of NATO’s 2% defence spending target since 1991 – left the continent dangerously exposed. The Russian invasion of Ukraine already highlighted European weakness for all to see, but the election of Donald Trump has definitively ended any illusions that the status quo could survive. The days of assuming the U.S. would foot the bill for continental security are over. As the threat environment hardens, European governments are racing to rebuild that deterrent, but this will take time.
For investors, this marks a structural and cultural shift. Defence companies once excluded from ESG portfolios are rapidly returning to favour. As the former UK Defence Secretary Grant Shapps put it, “Investment in defence is the morally right thing to do,” a sentiment echoed by NATO Secretary General Jens Stoltenberg, who dismissed the notion that defence firms are “unethical”.
Today, defending liberal democracy is ESG.
Before the full-scale invasion of Ukraine, European members of NATO fell well short of their 2% GDP spending obligations. As of today, most large nations now exceed this target with the exceptions of Spain and Italy. However, a growing consensus is forming that not even this momentum shift will be enough. Both President Trump and NATO’s Secretary General, Mark Rutte are demanding as much as 5% of GDP from NATO members going forwards. Before 2022 Germany, the largest economy in Europe consistently failed to meet their 2% target, today German Chancellor Friedrich Merz has proposed that Germany will raise its defence budget to as much as 3.5% of GDP by 2027 with a further 1.5% on infrastructure. Where Germany leads, other European nations will surely follow and this presents investors with a unique set of circumstances to re-appraise the industry.
Source: BBC
Things are changing fast – the chart above shows the massive change in defence spending that is taking place across Europe – this trend will continue with German Chancellor Friedrich Mertz now endorsing a rise to 5% of GDP.
A European imperative
For hard proof of the shift underway in European defence, look no further than German defence equipment manufacturer Rheinmetall which is owned in the Cerno Future Strategy. The company is seeing unprecedented demand for ammunition and armoured vehicles and is rapidly expanding operations. 1Q25 sales increased 46% year‑on‑year to €2.31bn, driven by a 73% upswing in its defence arm and a staggering €11 billion order intake boosted by pull‑forward trends. The ammunition business has seen exponential expansion as they are unable to keep pace with demand from European armies to simultaneously refill empty stockpiles and to supply Ukraine: Rheinmetall expects to scale 155 mm artillery shell output from near-zero levels a few years ago to 1.1 million rounds annually by 2027. This industrial expansion is backed by major investments such as a €600 million upgrade at Unterlüß (doubling capacity to 350k shells/year), new plants in Lithuania and planned expansions in Romania, Hungary, and Ukraine.
Rheinmetall isn’t alone. German sensor specialist Hensoldt has raised its long-term revenue forecast for 2030 from €5 billion to €6 billion, citing booming demand for radars, optronics, and avionics amid Europe’s defence revival. Q1 2025 saw its order intake climb to €701 million. Similar record orders are being experienced right across the European defence sector. Time and again price targets have been raised by brokers and then exceeded by reality.
Source: Rheinmetall
Ambitious targets likely exceeded – Rheinmetall struggles to keep up with demand from supporting Ukraine and the need to replenish stockpiles in Europe.
Europe is changing because it has no choice. In Germany, the once-sacrosanct debt brake was effectively bypassed to allow for a landmark €100 billion special defence fund, marking a dramatic reversal of Berlin’s long-standing military restraint. Across the EU, the bloc has taken unprecedented steps toward strategic autonomy, including the launch of the European Defence Fund (EDF)—a multibillion-euro initiative to co-finance joint military R&D and procurement projects among member states. These moves show that this is not just talk – Rheinmetall are laying down factories – shells are rolling off production lines and Europe is spending. With Trump openly questioning NATO’s mutual defence clause and threatening to withdraw American support, European governments have accelerated rearmament, increased interoperability, and pushed for greater industrial coordination—ushering in what many now call the birth of a truly European defence identity.
The future of European defence will depend on cooperation, technological leadership, and a willingness to back innovation with capital. The Cerno Future Strategy aligns with these principles, backing the companies and ideas that will not just rebuild Europe’s deterrent but define the next generation of security technologies.
Drones: Reshaping warfare
Operation Spiderweb – Russian long-range bombers are destroyed by Ukrainian FPV drones. Video released by The Ukrainian Intelligence Agency (SBU).
Drones have become the defining technology of the war in Ukraine, fundamentally reshaping how modern conflicts are fought and redefining military strategy across land, air, and sea. No longer limited to surveillance roles, drones now serve as frontline weapons of disruption, destruction, and deterrence. The conflict has become a proving ground for rapid unprecedented drone innovation, with both Ukraine and Russia now locked in a fast-moving arms race. From cheap, agile FPV drones that hunt tanks and infantry positions with precision, to suicide sea drones capable of taking out Russian warships or caring antiair missiles, drones have given both sides powerful tools.
The proliferation of drones has made mass armoured assaults at the line of contact in Ukraine basically impossible. Vehicles are quickly spotted and destroyed. Sophisticated electronic warfare has been developed by both sides to counter this overwhelming threat, and it is highly effective at disabling drones. This has led to the development of fiber optic drones that are impervious to radio jamming. Today these drones travel tens of kilometers over the Donbass countryside, spooling out a thin wire behind them, their video feed perfect until they reach their targets. No place is safe; the drones can fly through the smallest gap in a broken window into a cellar filled with ammunition. Today the countryside of eastern Ukraine is littered with tails of shiny thread like spiders’ webs. The emergence of fiber optic drones in 2025 is illustrative of the rapid innovation of a brutal war that is changing views of the modern battlefield across the whole defence industry.
Fiber optic cables litter the Donbas countryside; it is impossible to walk without becoming caught in a mat of hair thin wires. Source: REPost, AS News Bureau, Estonia.
One of the most impactful demonstrations of their strategic value was the recent Operation Spider Web, where Ukraine was able to strike at the Russian fleet of long-range bombers at airfields thousands of kilometres away. These aircraft—vital to Moscow’s bombing campaign—were not only enormously expensive but also nearly irreplaceable for Russia. The operation revealed how low-cost, highly maneuverable drones could devastate some of the most advanced and best-protected military hardware, undermining traditional assumptions about air superiority and static defense.
Equally significant has been Ukraine’s bold and highly successful deployment of sea drones, which have played a pivotal role in pushing Russia’s navy back from the western Black Sea. These unmanned maritime vehicles—essentially remote-controlled speedboats packed with explosives—have struck Russian warships and naval installations with growing frequency and precision. As a result, Russia has been forced to relocate much of its Black Sea fleet, effectively ceding control of key maritime zones. This shift has allowed Ukraine to reopen several of its Black Sea ports, resuming vital grain exports and breaking Moscow’s de facto blockade.
We are mindful of the impact of drone warfare on the future of defence and are invested in drone specialist Kratos which is developing supersonic autonomous aircraft. We also have exposure through other defence names, and see drone and anti-drone strategy as key to future deterrence.
Space: Indispensable intelligence
From the very start of the full-scale invasion of Ukraine it immediately became clear that the services provided by new space companies were indispensable. SpaceX’s Starlink has emerged as a backbone of battlefield connectivity. During the siege of Azovstal in Mariupol, Ukrainian defenders could still communicate with the outside world even when they were totally surrounded with all mobile phone masts destroyed and power cables cut.
The arrival of advanced situational awareness from new space companies now goes even further. Finnish microsatellite specialist ICEYE, known for its constellation of small Synthetic Aperture Radar (SAR) satellites, recently entered into a joint venture with German defence giant Rheinmetall, forming Rheinmetall ICEYE Space Solutions—Rheinmetall holding 60% and ICEYE 40% share—focused on manufacturing SAR satellites in Neuss, Germany. We have exposure in the Cerno Future Strategy to Iceye through our position in the Seraphim Space Investment Trust. This partnership highlights a shift toward sovereign, Europe-based production of space assets designed to deliver round-the-clock, all-weather surveillance to military users. It also shows just how important the space component of defence has become.
Cross-domain autonomy: Redwire acquires Edge Autonomy
U.S.-based space infrastructure firm Redwire recently completed a $925 million acquisition of Edge Autonomy, a provider of combat-proven uncrewed aerial systems that are being developed and used in Ukraine. This strategic move signals the convergence of space-based capability and drone tech, enabling integrated architectures where autonomous aerial systems can be controlled, navigated, or tasked using satellite links, including for long-range ISR and strike missions. Redwire’s expanded portfolio suggests future defence platforms will closely link orbital sensors and communications with autonomous drones for real-time, multi-domain operations.
For defence planners and militaries, the rise of private space companies like ICEYE, Redwire, and SpaceX marks a profound shift:
● Persistent ISR from low-earth orbit enables continuous targeting updates and dynamic battlefield awareness.
● Seamless integration of satellite links with drone systems allows for autonomous or semi-autonomous operations that transcend range limitations.
● Resilient communications in denied or jammed environments ensure that frontline units and UAV operators stay connected.
These developments signal that space capabilities are no longer peripheral but core enablers of modern military strategy. The military-space-drone nexus is becoming central to operational planning, turning the vast domain of space into a live, adaptive combat zone–where satellites not only observe but enable action through drones and battlefield connectivity.
AI: The Strategic Engine Behind Autonomy
In modern conflict, autonomy is power. From real-time battlefield analysis to autonomous drone swarms, AI is no longer a “nice to have.” It is a necessity. Defence AI capabilities are evolving rapidly, and Europe is keen to close the gap with the U.S. and China. These technologies will determine not just who wins the next war, but how it’s fought. Real-time threat detection, target acquisition, decision support—AI is the connective tissue of next-generation defence. In the US we see the shift to AI with companies like Palantir muscling in on territory traditionally occupied by Lockheed Martin and Northup Grummam. As autonomous systems proliferate, AI’s role will only deepen. German company Hensoldt integrates AI into sensor fusion platforms for enhanced situational awareness. Their “Cognisant” system uses AI to combine radar, optical, and infrared data into a coherent battlefield picture—essential for threat tracking and air defence. The future of defence will see AI enhancing legacy defense but also leading to AI-driven systems capable of operating faster, smarter, and with minimal human input.
Investing in resilience
In a fragmented world, resilience has value. The autocrats of the world are testing the resolve of liberal democracies, probing for weaknesses. Putin pushes forward in Ukraine and Xi builds up his forces for a possible attack on Taiwan. Europe’s answer must be to build up its own deterrence to a level not seen in more than forty years while paying special attention to the technologies that are shaping modern warfare. The Cerno Future Strategy is rooted in reality: The world is becoming more fragmented and more dangerous. The war in Ukraine and the ambivalence of the Trump administration to historical allies and the very concept of sovereignty has dramatically increased the risks of war. In the Cerno Future Strategy we are backing the themes that matter most for future deterrence and security of democratic nations.
The cost of complacency – Aftermath of Russian Iskander cruise missile strike on town of Kurakhove. Picture taken by Author on Iphone – November 2023. Further details found here.
To find out more about the Cerno Future Strategy, click here.
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