Drones and defence stocks rise up investors’ wishlists

A sweeping rearmament trend is redrawing the investment map. From renewed defence budgets in Europe to a race for critical resources, investors are now recalibrating portfolios to align with the imperatives of national security and economic resilience.

As tensions continue to flare up in the Middle East and Ukraine, with US-China rivalry deepening, governments are boosting military spending and steadily reindustrialising.  Ripple effects are being felt across sectors ranging from cyber security and advanced manufacturing to energy infrastructure and critical minerals. This rearmament wave, say leading investment voices, represents a structural shift, not a temporary anomaly. 

Family offices and wealth managers are reassessing their exposure to sectors positioned to benefit from a renewed focus on national security.

“This is a long term, structural and profound theme,” says Aymeric Gastaldi, international equities portfolio manager at the Paris-based family-owned investment house Edmond de Rothschild. “Europe has experienced 30 years of under-investment. Threats are re-emerging at a time when we are the least prepared.”

The Nato military spending target, expected to rise for member nations from 2 per cent of GDP to 5 per cent by 2035, underpins Mr Gastaldi’s view that European defence manufacturers face a decade of double-digit growth. As rearmament unfolds, the investment story is extending far beyond traditional arms makers.

Defence hardware

Graeme Bencke, manager of the WS Amati Global Innovation Fund, notes that “the companies providing weapons and technologies for the battlefields of tomorrow”,  including counter-drone systems, space infrastructure and advanced sensors, are seeing compound growth as demand accelerates.

Since its 2022 launch by Amati Global Investors, an Edinburgh-based boutique investment house, the fund has allocated 10 per cent of its portfolio to such firms, which have emerged as top performers.

But defence hardware is just the tip of the spear. Today’s security paradigm encompasses “force multipliers”, such as drones, autonomous systems and encrypted satellite communications, and extends into the digital domain.

“Cyber operations have turned the convenience of our connected world into a strategic liability,” says Mr Bencke, whose fund holds Booz Allen Hamilton among other tech-enabled defence contractors. “This brings a whole new industry into the defence equation.”

The geopolitical drive to secure resources is also reshaping commodity markets. “Access to strategic resources is becoming a central challenge in an increasingly fragmented world,” says Edmond de Rothschild’s Mr Gastaldi. “Companies offering solutions for energy autonomy, from local renewable generation to enhanced oil recovery, are well-positioned to perform.”

Water, too, is emerging as a geopolitical flashpoint. From climate-driven scarcity to the demands of AI-era data centres, pressure on freshwater supplies is mounting. “Expect companies focused on recycling, desalination and filtration to attract rising investment,” Mr Gastaldi adds.

In the US, renewed focus on industrial capacity is driving a parallel rearmament of the economic base. Arnab Das, global macro strategist at Invesco, argues that America’s long-term success with protectionist policies depended on a unique blend of external tariffs and domestic deregulation, a lesson that may shape today’s policy decisions.

“The success of rearmament depends on how extensive the protection is, how high the trade barriers are, and critically, whether countries deregulate,” Mr Das explains. “Protection without reform leads to inefficiency, but with deregulation, it can fuel industrial resurgence.”

He adds that a shift towards more cyclical and geographically diversified portfolios is now warranted as the US loses some of its “exceptionalism” amid broader global re-industrialisation.

Beyond markets, the strategic landscape is growing more perilous. Recent Israeli strikes on Iranian nuclear infrastructure have raised questions about the sustainability of the Non-Proliferation Treaty (NPT). Mr Das notes that while near-term risks of wider conflict may be contained, the long-term picture is murkier.

Regional proliferation

“If Iran succeeds in acquiring nuclear weapons, others, especially Saudi Arabia, may feel compelled to follow,” he warns. “This raises the spectre of regional proliferation.”

Still, the presence of nuclear arms, as seen in the India-Pakistan-China dynamic, may paradoxically raise the threshold for war. But it also increases demand for conventional deterrence, elevating spending on traditional and hybrid defence.

While Russia’s invasion of Ukraine and Iran-Israel tensions dominate headlines, the broader strategic rivalry between the US and China is becoming the defining axis of global investment planning.

“In an era where nobody trusts anyone anymore, everyone needs to deter everyone else,” Mr Das says. “This is not just a military issue, it’s a geopolitical megatrend driving economic and financial decisions.”

For investors, the message is clear: rearmament is not a sector-specific trade, but a cross-cutting theme, touching everything from industrial policy and energy security to digital infrastructure and resource autonomy.

As the global order fragments, those who adjust their portfolios accordingly may not only mitigate risk but also capture long-term growth born of strategic necessity.