Davos 2026: The Rise of ‘Hard Power’ and its Impact on European Markets
The World Economic Forum’s annual meeting in Davos 2026 underscored a significant shift in global thinking: the increasing importance of “hard power” and tangible assets in a fractured geopolitical landscape. Experts from GAM Investments, observing the discussions, believe this trend will have profound implications for European markets, particularly favoring sectors tied to industrial strength and strategic autonomy.
A World Moving Towards ‘Great Power Politics’
German Chancellor Friedrich Merz explicitly stated the world is entering an era of “great power politics,” where “strength, pressure, and power” are central. This sentiment was echoed by French President Emmanuel Macron, who emphasized the need for Europe to defend itself against economic and political coercion. These statements signal a move away from reliance on traditional diplomatic approaches and towards a greater emphasis on self-reliance and industrial capability.
Trump’s Influence: A Catalyst for European Independence
The presence of former US President Donald Trump at Davos further amplified these concerns. His comments highlighted the risks of over-dependence on external partners and underscored a focus on economic sovereignty and transactional diplomacy. His Commerce Secretary, Howard Lutnick, went further, stating that “globalization has failed the West and the United States of America,” suggesting a re-evaluation of past economic policies.
This shift in US policy, whether sustained or not, is prompting Europe to accelerate efforts to protect strategic supply chains and bolster domestic industries. For European equity markets, this translates to sustained political support for defense platforms, energy infrastructure, advanced manufacturing, and critical technologies.
Beyond Transition: A ‘Rupture’ in Global Order
Mark Carney, former Governor of the Bank of Canada, framed the current environment as a “rupture, not a transition.” He warned that supply chains, finance, and trade are increasingly being weaponized, emphasizing the urgency for Europe to build scale and resilience in strategic sectors. His stark warning – “if you’re not at the table, you’re on the menu” – resonated with leaders seeking to secure their nations’ futures.
Which Sectors Stand to Benefit?
The consensus emerging from Davos 2026 points to specific sectors poised for growth. These include:
- Aerospace and Defense: Increased European defense budgets and long-term procurement cycles offer stability and growth potential.
- Energy Infrastructure: Investment in energy networks and security is becoming paramount.
- Industrial Automation: Demand for automation technologies is rising as nations seek to onshore production.
- Critical Technologies: Technologies essential for security, economic strength, and industrial supply chains – such as chip manufacturing equipment and electrical grid technology – are receiving increased attention.
These sectors are characterized by high capital intensity, ties to real assets, and significant barriers to entry, making them attractive for long-term investment.
A ‘Sovereign Premium’ for Strategic Industries
The overall message from Davos 2026 suggests a potential “sovereign premium” for European companies operating in these strategic industries. Which means investors may be willing to pay a higher valuation for companies that contribute to national security and economic resilience.
Did you realize? The focus on reshoring and strategic autonomy is reminiscent of post-World War II efforts to rebuild European industries, but with a renewed urgency driven by current geopolitical tensions.
FAQ
Q: What is ‘hard power’ in this context?
A: It refers to the employ of military and economic strength to influence international affairs, as opposed to ‘soft power’ which relies on cultural and diplomatic influence.
Q: How will this impact smaller European economies?
A: Smaller economies may benefit from increased investment in strategic sectors and opportunities to specialize in niche areas of critical technologies.
Q: Is this a long-term trend?
A: Experts believe the shift towards prioritizing strategic autonomy and industrial capability is likely to be a sustained trend, driven by ongoing geopolitical instability.
Q: What role does technology play in this shift?
A: Technology is central, as it underpins both the threats and the solutions. Investment in critical technologies is essential for maintaining a competitive edge.
Pro Tip: When evaluating European equities, prioritize companies with strong ties to government contracts and those operating in sectors deemed strategically important by national governments.
Explore further analysis of geopolitical risk and investment strategies on our Global Insights page. Share your thoughts on the implications of Davos 2026 in the comments below!
