The escalating geopolitical tensions driven by great power rivalries and conflicts have made defense a critical focus for policymakers and investors, according to Kim Catechis, Investment Strategist at the Franklin Templeton Institute. These geopolitical pressures, comparable in impact to climate change, are now immediate, direct and global in reach, shaping policies and influencing investment returns.
“The abrupt reversal of the peace dividend has brought us back to the era of large-scale kinetic warfare and urban combat—scenarios not seen in Europe since World War II,” Catechis explains in his recent paper ‘Deep waves: the paradoxical trinity of defense’. “This shock has driven a rapid acceleration in defense investment, from modernising equipment and training to recalibrating supply chains and boosting domestic industrial production capacity.”
The Russian war on Ukraine has compelled Europe and the broader global community to confront the necessity of a credible deterrent supported by robust logistics and manufacturing. Catechis highlights that the European Commission has launched its first-ever European Defense Industrial Strategy (EDIS) to strengthen the EU’s defense readiness and industrial base.
Globally, defense spending reached a record US$2.4 trillion in 2023, marking the ninth consecutive year of growth. NATO members in Europe alone are expected to invest US$500 billion annually in defense through 2030, underscoring the sector’s scale and potential.
Catechis outlines three core aspects of the defense investment case:
- Magnitude of investment: “Many countries are rethinking their defense architectures, leading to significantly higher capital investment than currently expected,” says Catechis.
- Longevity of the theme: “The transformation of military capabilities required for modern asymmetric warfare ensures that this investment theme has a decades-long runway,” he adds.
- Diverse opportunities: As defense evolves, so does its definition, encompassing both traditional armaments and emerging technologies such as low-Earth orbit (LEO) satellite communications, AI-driven data systems and unmanned vehicles for surveillance and reconnaissance. These innovations, often dual-use in nature, are expected to drive productivity in civilian sectors over time.
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Catechis highlights non-traditional players like Anduril and Shield AI, which are disrupting the defense sector by focusing on high-speed, multi-domain coordination. “These companies, much like SpaceX and Palantir before them, are rapidly achieving unicorn status, reflecting their impact on the sector.”
Data suggests approximately 850 funding rounds for such companies in the United States alone since 2018, signaling growing investor interest in these niches.
Traditionally, ESG-aligned investors have avoided defense companies. However, the Russian aggression in Ukraine has prompted a reassessment, particularly in Northern Europe, where many pension funds now view defense investment as a national interest imperative.
“Each asset owner must weigh ethical considerations and fiduciary responsibilities in alignment with stakeholder values,” Catechis says. “Some investors adhere strictly to principles precluding defense investments, while others align with government policies to meet emerging needs.”
Catechis highlights the transformative potential of dual-use technologies which offer exposure to the highest-priority areas of defense spending, including cybersecurity, LEO satellites and unmanned drones. “Private equity and direct participation in real assets provide the most promising avenues for long-term investment, particularly in these rapidly growing segments.”
