Fund managers are becoming more bullish on defense stocks due to recent conflicts in the Middle East, pledges from NATO allies to raise defense spending that will boost the outlook for the Indian subcontinent and the arms industry. The sector has earned solid profits this year, with analysts suggesting that interest in defense will grow even further. According to LSEG data, the MSCI Europe Aerospace and Defense Index (USD) has skyrocketed about 70% this year, while the Ishares US Aerospace & Defense ETF (ITA) has earned over 25%. The US defense ETF reached a new all-time high in the state on Thursday morning, but the European fund rose to record highs, adding nearly 6% since June 13, when Israel-Iran disputed. ISHARES US Aerospace & Defense ETF has been earning over 2% since June 13th. The rise in defence inventory has increased geopolitical uncertainty and encouraged a rush to defence assets in pursuit of President Donald Trump’s trading approach to defence and greater spending by partners. “The rise in Middle East and US interventions could further raise concerns about wider regional conflicts, raise additional investors’ interest in the sector and encourage new purchase waves by fund managers,” said James Penny, chief investment officer at TAM Asset Management in the UK, saying he is increasing defense exposure through active global fund managers, adding that he is focusing on defence weapons in the European Union and turning it into defence stocks around the world. Fund managers and other industry experts CNBC said that defence stocks began traction in 2022 when Russia invaded Ukraine, but saw a particularly strong surge in popularity this year. Data provided by Morningstar shows that since the Russian-Ukureen conflict, asset managers have almost doubled their allocation to defensive stocks. Peter Andersen, chief investment officer at Andersen Capital Management, told CNBC he has actively adopted defensive investment after foreseeing that Trump’s long-standing criticism of NATO member states will continue in his current term. “For me, that was when Trump took office. It was a green light signal,” he said. On Wednesday, the NATO allies promised to raise their defensive spending targets from 2% of GDP to 5% by 2035, making the alliance’s most decisive move in more than a decade. Andersen has established himself in the basket of European defence stocks since the beginning of the year, adding that his conviction in the broader defence sector has been further reaffirmed given the recent developments in the Middle East and the movement by NATO to raise defense spending. Trump criticized NATO, questioned Article 5 commitments, temporarily suspending military aid to Ukraine in early March, and issued an alarm among the European government. “The actions and rhetoric of the Trump administration have convinced European leaders that the US security umbrella is no longer guaranteed,” said Tom Bailey, director of research at Hannett. “Europe could no longer rely on imports of US military equipment, and there was a growing sense that they had to achieve ‘strategic autonomy’,” Bailey said. At the same time, he added, Germany relaxed its fiscal rules and increased interest in the defence space after the February 2025 election. Bailey added that the future of HANETF’s defense UCITS ETF, which grants NATO and NATO+ Allies’ defense exposure, has seen a net inflow of around $1.3 billion this year alone. Europe is not the only region of market watchers’ radar. HANETF is hoping investors’ interest will also rise in the Indo-Pacific. “The Indo-Pacific region is a region full of potential major geopolitical flashpoints,” Bailey told CNBC, citing India’s border disputes with Pakistan, tensions between China and Taiwan, and territorial claims in the South China Sea. Andersen of Capital Management noted that “additional upsets around the world” were added to investors’ uncertainty and influx at this point. Similarly, Mercer, a global consultant at the Pension Fund, believes that the rush to defence stocks will continue to grow from here only. The recent conflict has further heightened investors’ awareness, “making them think about defense and think about defense stocks more often,” said Jay Love, Mercer’s US chief investment strategist. “There is growing geopolitical conflict, and simply different ideologies are growing,” Love added. However, Love pointed out that although he likes the defense industry, many of the profit margins of these companies have been eased and are relatively expensive to buy. “The ratings are not low, and it’s being challenged, especially profitability, margins,” he added.
