Defence emerges as a global investment theme amid geopolitical tensions

Defence emerging as a global investment theme amid geopolitical tensions

Amid heightened geopolitical uncertainty, the global defence sector is rapidly gaining traction as a key investment theme. Governments across the world are ramping up military budgets in response to escalating conflicts, strategic competition, and the shifting global order. Investors are responding in kind, pouring capital into defence stocks and exchange-traded funds (ETFs) that are benefitting from both policy momentum and earnings resilience.

According to the Stockholm International Peace Research Institute (SIPRI), global military spending surged to a record $2,718 billion in 2024, marking a 9.4% increase over the previous year. This represents the sharpest year-on-year rise since the Cold War era. The five largest spenders - the United States, China, Russia, Germany, and India accounted for 60 percent of the global total, underscoring the scale and concentration of defence outlays.

Vikas Gupta of Omniscience Capital notes that this shift in defence spending has created major opportunities for both established Western defence firms and emerging players like India. “Developed countries’ defence companies are definitely going to get orders, primarily from their own governments.” However, it’s not just Western nations reacting to global instability. Emerging countries are also recognizing the need to invest in national security, he says. “Countries like the Philippines, Vietnam, Egypt some South American nations too they all need to build up defence, but buying from developed countries is often too expensive,” he explained. “That’s where Indian companies have an opportunity, he added.

How stocks have performed

In the United States, defence stocks have remained resilient despite wider market volatility. Major players such as RTX Corp, Lockheed Martin, Northrop Grumman, and General Dynamics continue to attract strong investor interest. Investors looking for broader exposure are turning to sector-specific ETFs such as the iShares U.S. Aerospace & Defense ETF, SPDR S&P Aerospace & Defense ETF, and Invesco Aerospace & Defense ETF.

India's defence industry is experiencing a strong rally as well, supported by a strong policy focus on indigenous manufacturing and increased government contracting. Shares of Mazagon Dock Shipbuilders have surged more than 180% so far in 2024, while Bharat Electronics Ltd (BEL) is up 38 percent year-to-date. The push for self-reliance in defence production is accelerating capital flows into Indian defence companies, many of which are reporting robust order books and expanding margins.

Globally, defence companies, outside the US, are also showing strong performance, though many now trade at elevated valuations. Germany’s Rheinmetall AG has seen its stock rise 213 percent over the past year, with a YTD return of 169.1 percent. It trades at a forward P/E of 47.9, which may suggest that a significant future growth is already priced in. The UK’s BAE Systems has seen a 1-year return of 31.7 percent and YTD return of 56 percent, trading at a forward P/E of 22.7. Italy’s Leonardo SpA has returned 126.3% over the past year and about 97 percent in the last six months, with a forward P/E of 25.8.

Asian Defence stocks have also gained with South Korea’s Hanwha Aerospace delivering a 1-year return of nearly 297 percent, and a YTD gain of 171.7 percent, trading at a P/E of 94.7. Korea Aerospace Industries is also up 66.7 percent over the past year and 61.5 percent YTD, with a forward P/E of 29.2.

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