Defence spending

This follows 2025's reform of the constitutional debt brake, which freed up €500bn for infrastructure and exempted defence spending from fiscal constraints entirely.

The company is at the sweet spot of a number of focus areas in defence spending, including Battlefield Communications, Modern Soldier Programme and drones.

Dinged by transformative 2021 FLIR acquisition, expectations and valuation reset, balance sheet is clean, and the company is positively exposed to rising defense spending, reshoring and physical AI.

First, governments, due to a complex geopolitical landscape, are increasingly prioritizing the onshoring of supply chains, securing energy independence, ramping up defence spending, and building strategic stockpiles.

Shares of Rheinmetall came under pressure amid concerns over the outlook for European defense spending, the potential impact of emerging defense technologies such as drones, and the cancellation of a planned €12 billion frigate contract by the German government.

Recent weakness also reflected signs that some incremental defense spending may shift away from traditional prime contractors.

Within industrials, defense-oriented businesses illustrate our focus on companies benefiting from structural changes in government procurement and defense spending.

Defense spending has reached record levels, domestic manufacturing investment has surged following a depression caused by globalization, and medical innovation continues to attract substantial research and development spending.

Although the group lagged the broader market during the quarter, we continue to view the global defense spending backdrop as favorable, particularly outside the US, where a more challenging geopolitical environment is supporting increased investment.

Wars evolving, though accelerated defence spending here to stay Geopolitically, the picture remains fluid – from the Middle East to Eastern Europe – but the direction of travel on defence spending is not: governments globally are rearming.

Both companies have been excellent investments for the portfolio, benefiting from rising global defense spending, strong export demand and growing interest in Korean air-defense and weapons systems in the Middle East.

Our long-term thesis is unchanged: defense spending growth remains well supported across NATO member countries over the coming decade, with BA/ LN well positioned to benefit.

Real interest rates may also face upward pressure from rising capital demands associated with industrial policy, energy-transition investment, AI infrastructure buildouts, defense spending, space endeavors, and the fragmentation of globalization.

Elevated fleet utilization drove increased demand for maintenance, repair, and overhaul (MRO) services, spare parts, and engine shop visits, supporting GE Aerospace's highest-margin 3 businesses, while heightened geopolitical tensions also supported expectations for stronger global defense spending and increased demand for the company's military propulsion systems.

There’s more nuance there – aerospace has some exposure to defense spending, not all travel is air travel – but not that much more.

In the first instance, this means higher defence spending, but it also means data and cybersecurity.

As a result, the region is entering a multi-year phase of significant capital deployment across core structural vectors: energy transition infrastructure, defense budgets, and localized technology advancement.

It is well positioned to navigate a rapidly evolving industry, and we see the valuation as undemanding and the dividend as sustainable, with scope for significant total shareholder returns if defence spending surprises to the upside in the coming years.

For now, the global growth outlook is improved, and we expect secular growth drivers such as electrification, security of supply, deglobalisation and increased defence spending to be reinforced by the war.

We have increased our exposure, particularly within industrial companies benefiting from electrification, the energy transition and defense spending.

Earlier this month, China began removing some of the restrictions on their refineries and easing export bans on refined petroleum products.1 Ceasefire over, war continues Speaking at the NATO summit in Ankara, Turkey, President Trump stated that the U.S. ceasefire and the June Memorandum of Understanding (MoU) with Iran are "over".

Our fundamental assessment is unchanged: conflict on European soil and Washington's pressure on NATO allies continue to drive demand for the company's systems sharply higher.

We added several new positions in the industrials sector indexed to AI power demands and secular growth in defense spending.

BAE similarly ran up due to the war and, presumably, investor conviction in wartime defense spending, then came back down.

Aside from inflation, the government’s budget deficit continues to grow due to rising social program costs and the administration’s desire to significantly increase defense spending.

National Security (13.8%) : Rising global conflicts and recent military skirmishes with neighboring countries is leading India to accelerate defense spending with increased focus on domestic manufacturing.

We believe growing defense spending, a recovery in industrial end markets and its disciplined approach to capital allocation and acquisitions are strong growth drivers.

New order activity has been limited since December, aside from a large satellite communications contract renewal in late June from an undisclosed NATO country.

Lockheed Martin: LMT was a top contributor for the quarter, gaining 26% as the onset of the U.S.–Iran conflict in late February drove a significant re-rating of defense spending expectations.

Additionally, the stock is benefiting from broader tailwinds in the defense and space sectors, as heightened geopolitical tensions and proposals to increase defense spending have driven investor interest.

Revenue growth has accelerated from an increase in defense spending in Ducommun key areas, margins have improved given recent facility consolidations, and the company has seen a positive mix shift in the company's revenue.

Our investment case is anchored by a record order backlog that provides exceptional revenue visibility for the coming years, supported by heightened global demand in naval and defense spending as governments worldwide accelerate military modernization.

Prime Minister Takaichi has accelerated the 2% GDP defense spending target, now set to be achieved as early as Fiscal Year 2026.

I am alert to these shifts and the developments in Artificial Intelligence, US domestic politics, the White House, Tariffs, NATO and the various wars that are sadly ongoing.