Why fund managers are loading up on defense stocks
Fund managers are getting more bullish on defense stocks, with recent conflicts in the Middle East, the Indian subcontinent as well as NATO allies' pledges to raise defense spending boosting prospects of the arms industry. The sector has seen robust gains this year and analysts suggest the interest in defense will grow further. The MSCI Europe Aerospace and Defense Index (USD) has surged about 70% this year, according to LSEG data, while the iShares US Aerospace & Defense ETF (ITA) has gained more than 25%. The U.S. defense ETF hit a fresh all-time high on Thursday morning stateside, while the European fund has risen to a record high levels, adding almost 6% since June 13 when the Israel - Iran conflicted started. The iShares US Aerospace & Defense ETF has gained over 2% since June 13. The uptick in defense stocks has come at a time of heightened geopolitical uncertainty, with U.S. President Donald Trump's transactional approach to defense and calls for greater spending by partners also fueling a rush into defense assets. "Rising tensions in the Middle East and U.S. intervention have further heightened concerns of a broader regional conflict, driving additional investor interest in the sector and likely prompting a new wave of buying by fund managers," said Kenneth Lamont, principal or manager research at Morningstar. James Penny, U.K. chief investment officer at TAM Asset Management, said that he has been increasing exposure to defense through active global fund managers, adding that he was focused on rotating into defense stocks around the world, with a focus on European Union defense arms. Fund managers and other industry experts CNBC spoke to said that though the traction in defense stocks started back in 2022 when Russia invaded Ukraine, this year has seen a particularly strong surge in their popularity. Asset managers have almost doubled their allocations to defense stocks since the Russia-Ukraine conflict, data provided by Morningstar showed. Peter Andersen, chief investment officer at Andersen Capital Management, told CNBC that he made the move to pile on defense investments after foreseeing that Trump's long-standing criticism of NATO member countries not spending enough on defense will continue in his current term. "To me, it was when Trump took office. That was the green light signal," he said. NATO allies on Wednesday committed to raising their defense spending goal to 5% from 2% of GDP by 2035, marking the alliance's most decisive move in over 10 years. Andersen has been building his position in a basket of European defense stocks since the start of the year, and added that his conviction in the wider defense sector has only been reaffirmed further given the recent developments in the Middle East and NATO's move to hike defense spending. Trump had criticized NATO, questioned Article 5 commitments, and temporarily pausing military aid to Ukraine in early March — raising alarm among European governments. "The actions and rhetoric of the Trump administration convinced European leaders that the U.S. security umbrella was no longer guaranteed," said Tom Bailey, head of research at HANetf. "There was a growing sense that Europe could no longer rely on importing U.S. military equipment and had to achieve 'strategic autonomy,'" said Bailey. At the same time, after the elections in February 2025, Germany loosened its fiscal rules, lifting interest in the defense space, he added. Bailey added that HANetf's Future of Defense UCITS ETF, which grants exposure to NATO and NATO+ allies' defense, saw around $1.3 billion in net new inflows this year alone. Europe is not the only region on market watchers' radar. HanETF is expecting investor interest to rise in the Indo-Pacific as well. "The Indo-Pacific region is a region full of potential major geopolitical flashpoints," Bailey told CNBC, citing India's border dispute with Pakistan, tensions between China and Taiwan, and territorial claims in the South China Sea. Capital Management's Andersen pointed out that "additional agitation around the world" at this point in time adds on to investor anxiety and inflows. Similarly, Mercer, a global consultant to pension funds, believes that the rush into defense stocks will only continue to grow from here. The recent conflicts raise investors' awareness further, and "makes you think about defense, defense stocks more often," Mercer's U.S. Chief Investment Strategist Jay Love said. "There'll be growing geopolitical conflict, just different ideologies growing," Love added. Love, however, noted that although he likes the defense industry, many of these companies' profit margins have been moderating and they are relatively expensive to buy. "Valuations are not low, and profitability has been mixed and challenged, particularly margins," he added.
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