Defence stocks have delivered robust gains, fuelled by rising geopolitical uncertainties and soaring government spending on advanced technologies such as cyber security and aerospace systems. Investors are homing in on companies providing critical infrastructure and innovation underpinning national security, while analysts highlight the sector’s resilience amid a complex international environment.
The BlackRock Investment Institute (BII), part of the world’s largest asset manager, announced this week a more granular approach to the defence theme, aligned with a surge in defence spending across the EU and Asia.
In its latest market commentary, BII said: “Geopolitical fragmentation and economic competition – a mega force, or big structural shift we’ve long tracked – is rapidly evolving across multiple fronts.”
It identified three key dynamics: the emergence of geopolitical blocs; escalating competition between those blocs – most notably the US–China race for AI dominance; and the rewiring of supply chains aimed at building resilience and bolstering national security.
“Together, these dynamics are deepening geopolitical fragmentation and sparking investment in defence globally,” it said.
Moreover, BII pointed to an imminent increase in defence spending in Europe, where many NATO members are expected to agree to up spending to 5 per cent of gross domestic product after this week’s NATO summit, with an expected 3.5 per cent slated for defence and 1.5 per cent for defence infrastructure.
Artificial intelligence (AI) is another driving force, BII said, adding that tech supremacy has become a national security priority – particularly for the US and China, where AI leadership is seen as critical to both economic advantage and military superiority.
“AI is expected to revolutionise how militaries around the world organise and operate,” BII said. “Take the use of drones in Ukraine and the Middle East, for example.”
Sydney-based counter-drone specialist DroneShield exemplifies this trend just this week. The company announced its largest single order in history – a $61.6 million European military contract that exceeds its entire projected 2024 revenue of $57.5 million.
The news sent DroneShield shares soaring just above 20 per cent.
Select on geographies
While optimistic on defence, BlackRock remains selective on geography and subsectors.
“Across regions, we eye opportunities in Europe as defence and infrastructure investment ramps up. Yet we stay selective for now given the over 60 per cent surge in its aerospace and defence sector this year, according to LSEG data,” BII said.
Instead, defence stocks in Japan and South Korea appear more compelling, alongside continued preference for the US – the world’s largest defence spender, home to the “most advanced” defence and technology firms.
Among sectors, BII highlighted defence tech – spanning AI, software, IT services and semiconductors that underpin advanced capabilities.
“We think many private companies in defence tech could launch initial public offerings (IPO) in coming years, allowing investors to tap this theme through public markets,” it said.
Ultimately, BII said: “Growing geopolitical fragmentation and strategic competition in AI are reinforcing the global focus on national security and resilience – creating opportunities in defence. But as both mega forces evolve, they call for a selective approach.”
ETF inflows signal sustained investor interest
Betashares, too, is backing global defence contractors headquartered in NATO or allied countries, including the US, Germany, the UK and France, with a clear line of sight on rising defence budgets.
The group also emphasised the theme extends beyond military hardware acquisition to broader resilience activities, including cyber security.
“It’s a timely reminder that conflict now extends to cyber space – with malicious hacking activity just as potent to critical infrastructure as traditional military hardware,” senior investment strategist Cameron Gleeson said.
“So while defence contractors are performing strongly amid growing orders for hardware, global cyber security companies will also benefit from more demand for their services.”
Since the start of 2025, Betashares Global Defence ETF (ASX: ARMR) has attracted $76 million in net inflows, while its Global Cybersecurity ETF (ASX: HACK) has drawn $60 million.
More broadly, defence exchange-traded funds (ETF) have flourished both globally – net inflows of US$7.5 billion since the start of the year – and locally, where they attracted $75 million of flows to become one of the most successful ETF themes to launch in recent years in Australia.
Speaking to InvestorDaily recently, investment strategist at Betashares, Tom Wickenden, said recent inflows into defence ETFs appear “fairly sustainable”, particularly if NATO adjusts its targets at its upcoming summit.
Yet, amid the rising defence budgets and investment flows, voices like chief economist Shane Oliver caution that the “peace dividend” – the economic benefit from reduced conflict – is effectively over, raising complex questions about the costs and consequences of escalating military spending.
