For defence investors the convergence of immediate military crises and structural geopolitical realignment has created the most compelling investment environment in decades. It promises to be not just a cyclical opportunity but a fundamental reshaping of the global security architecture that will drive sustained defence spending growth for years to come.
The combination of US-Iran nuclear brinkmanship, US President Donald Trump’s demands for 5% Nato defence spending and Europe’s historic fiscal pivot towards rearmament is driving unprecedented demand for military capabilities.
The weekend of June 21 marked a dangerous escalation in global tensions when the US launched Operation Midnight Hammer — targeted strikes on Iran’s nuclear facilities using B-2 stealth bombers, “bunker buster” bombs and Tomahawk missiles. This dramatic intervention followed Israel’s sustained assault on Iranian military infrastructure.
With Iran’s promised retaliation and concerns mounting about potential disruption to global shipping lanes through the Strait of Hormuz, many analysts are warning this could be the spark that ignites a broader Middle Eastern conflict.
These developments come against the backdrop of an already volatile global security environment. Russia’s war in Ukraine grinds on, China maintains increasingly aggressive rhetoric towards Taiwan, and more than 100 armed conflicts are active worldwide, according to the Geneva Academy. The spectre of nuclear-armed superpowers in direct confrontation has returned to haunt global markets and policymakers alike.
Simultaneously, Trump’s inauguration has fundamentally reshaped transatlantic security arrangements. His demand for Nato allies to spend 5% of their GDP on defence, more than doubling the 2% target, with explicit questioning of America’s security guarantees, has forced European nations into an urgent scramble for defence spending.
For investors, this convergence of immediate geopolitical crises and structural shifts in global security architecture has created unprecedented opportunities in defence stocks.
Germany has led the charge in plotting out a path to higher defence spending. In March, parliament approved exempting defence spending above 1% of GDP from constitutional “debt brake” rules, alongside a €500bn infrastructure fund. The defence ministry is seeking more than €60bn annually — a €10bn increase. Germany became the world’s fourth-largest military spender in 2024, at $88.5bn, finally meeting Nato’s 2% target. Goldman Sachs projects defence spending reaching 3.5% of GDP, with positive eurozone spillovers.
The defence spending momentum extends far beyond Germany. Poland, which shares a border with Russian enclave Kaliningrad, leads at 4.2% of GDP, with military spending up 31% to $38bn in 2024. Defence outlays in Central and Western Europe now exceed Cold War levels, rising 16% from 2022 to 2023 alone.
The defence landscape offers several investment pathways to capture the growth potential of the sector. Investors can build exposure to traditional arms companies such as Rheinmetall and BAE Systems, which benefit directly from European rearmament. Technology systems are also likely to benefit, with companies such as Hensoldt, Thales and Kongsberg providing sophisticated radar and electronic warfare capabilities.
Meanwhile, diversified aerospace operators such as Rolls-Royce, Airbus and Embraer balance defence and commercial exposure. A further segment worth considering is companies that provide infrastructure support, with Nato’s 1.5% GDP allocation to defence infrastructure set to benefit logistics and transportation companies.
The Flagship Global Equity Fund’s 6.7% allocation to defence stocks has delivered strong returns, with our holdings yielding returns of about 40% or more year to date. Howmet Aerospace is approaching record highs, Kongsberg Gruppen has delivered an almost 100% gain over the past 12 months, and Rolls-Royce is benefiting from civil and defence order books.
These gains reflect not just geopolitical tensions but fundamental structural tailwinds. Recent events such as the Israel-Iran strikes and Operation Midnight Hammer have demonstrated the continued relevance of advanced military technology, from B-2 stealth bombers to Tomahawk missiles.
Unlike previous cycles driven by specific conflicts, today’s environment reflects a fundamental recalibration of European security. With Nato allies preparing for potential US troop reductions, European defence budgets are entering a sustained period of expansion.
Catalysts that lie ahead include the Nato summit formalising 5% GDP targets, German budget implementation, EU defence integration and ongoing geopolitical tensions.
• Hayward is portfolio manager at Flagship Asset Management.
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