Defence stocks have soared — but where’s the value now?

The International Day of Peace falls on 21^st September, yet the world has seldom seemed less peaceful, with raging conflicts in Gaza and Ukraine, and the threat of escalation looming. Geopolitical conflict has been a major theme for global stock markets since the start of 2025, but after a significant rally in the defence sector, investors may need to find new ways to insulate their portfolios against international tensions. 

A boom in defence spending

The arrival of Donald Trump, and his forcing of a shift in defence spending across Europe has prompted astonishing gains for the defence sector. The MSCI World Aerospace and Defense Index is up 44.7% for the year to date, in dollars, compared with 13.8% for the wider MSCI World Index*. The Europe Aerospace and Defense Index has seen even stronger gains, up 70.54% for the year to date, compared with 22.3% for the MSCI Europe*. 

It has not just been the front line aerospace and defence companies that have benefited. In the technology sector, companies such as Palantir Technologies, a software group providing AI analytics and insights to the defence and governments sector, and cybersecurity groups such as Zscaler have also done well. Financial Times data shows that companies in the defence tech sector have raised €2.4bn since the start of 2022, including €1.4bn in the first seven months of this year**. In short, it has been a bonanza. 

Yet, it is difficult to make a case for investing in the defence companies today, even though they remain popular with retail investors. The average company in the MSCI World Aerospace and Defense Index trades on a price to earnings ratio of 41.5x, compared with 23.8x for the broader MSCI World Index*. This anticipates a lot of future spending.  

The index is dominated by US companies, and companies in the UK and Europe still look cheaper. In the UK, while companies such as Babcock International, BAE Systems, Rolls Royce or QinetiQ have performed well, they were starting from a lower base and valuations don’t look as extended. 

Are investors moving on?

However, active investors are starting to move away from the sector. Marcel Stotzel, manager of the Fidelity European fund, says of German defence company Rheinmetall: “Our view is that this boon is now fully discounted in the share price, as it is for other defence stocks in Europe. Although we agree that these companies are likely to see strong turnover growth in the years ahead, we expect margins to be more restrained. The public and their governments will be keen that such companies are not profiteering at a time when other areas of government expenditure are under huge strain to fund increases in defence spending.”

Where can investors turn instead? BlackRock World Mining Trust is another option. Commodities tend to be particularly sensitive to geopolitical tensions. Geopolitical tensions tend to see countries hoarding precious natural resources, which can drive prices higher. There is evidence of this happening already: China has used its dominant position in rare earths to good effect in its negotiations with the US, and has already imposed export restrictions on these metals, which are crucial elements in the defence, energy, and automotive sectors. The BlackRock fund’s diversified portfolio of mining assets should do well if commodity prices rise. 

Infrastructure might be another area to explore. While energy prices remain volatile, governments are likely to stick with their commitments to achieve energy security. Although Donald Trump has been bleeding money away from green energy assets, in the UK and across Europe, the drive for renewable power is still strong. TM Gravis UK Infrastructure Income invests in the UK listed infrastructure sector, and has significant weightings in a number of investment trusts, including significant weights in the Renewables Infrastructure Group, Sequoia Economic Infrastructure Income Fund and Greencoat UK Wind***. 

Read more: Who stands to gain from $64 trillion in infrastructure spending?

Gold and precious metals have also provided a bulwark against an unpredictable global environment. Geopolitical uncertainty is at least partly responsible for the recent run in the gold price, although the weakness in the dollar and uncertainty around US fiscal policy have also contributed. Even at its current high price, its ‘safe haven’ status makes it a hedge against geopolitical instability. 

Investing in gold mining equities, alongside silver and other precious metals, gives more diversified exposure. Gold mining equities have not kept pace with the gold price and therefore appear to offer more value. Georges Lequime, manager on the WS Amati Strategic Metals fund, says that in spite of near 100% rally in gold equities, “this is arguably quite disappointing, given the very strong Q2 earnings just reported. Usually the beta to the gold price is around 2-3x, so it suggests there could be a major catch-up rally to come if gold and silver prices hold these levels.” He says there is a disbelief in the current level of the gold price and we may need an extended period of time before investors and brokers start believing and adjusting their forecasts. 

Read more: Why gold, silver and lithium still have room to run

What if peace breaks out?

However, this is an International Day of Peace and it is worth considering what might happen should agreements be negotiated, however unlikely it may look at the moment. It is plausible that a breakthrough is found in Ukraine. When this has looked like a possibility (such as when Trump and Putin met in Alaska, there has been a broad-based rally in markets, but certain areas have done particularly well. 

It would remove some inflationary pressures, with commodities coming back onto the market. Rising food prices have been a major factor in the recent higher inflation figures and a resolution could help this area in particular. This, in turn, would allow further interest rate cuts. That might help interest rate sensitive areas – property, infrastructure, private equity or value stocks. Any rally is likely to be particularly pronounced in Europe, and in the UK, which has a higher reliance on energy imports. Expect gains in both markets should a deal be agreed. 

The direction of geopolitics can be difficult to predict and can change quickly. For investor portfolios, it is best to be prepared for the worst and hope for the best. 

*Source: index factsheet, 29 August 2025

**Source: Financial Times, 8 September 2025

***Source: Gravis Capital, 31 July 2025