The art of defense

There is hardly a sector that has undergone a more radical reframing than the defense industry has in recent years. What was once considered a moral minefield is being viewed today as the backbone of Western security. Geopolitical security concerns have given birth to an investment story: semantics have shifted, war has become defense, weapons have become security, and state policy has become an investment theme. And with each new armaments order, the dilemma between economic rationality and ethical responsibility grows.

From niche to narrative

Not all that long ago, the defense industry in Europe was widely considered a fringe sector economically as well as on stock exchanges. Defense budgets stagnated, order books collected dust, and institutional investors steered clear of the sector. Then war broke out in Ukraine, bringing about a paradigm shift. What was once a niche turned into a global investment theme driven by geopolitical realities, industrial necessity, and growing public acceptance. According to the Stockholm International Peace Research Institute (SIPRI), worldwide military spending in 2024 reached a historic record of USD 2.7 trillion. That equates to 2.5% of the world’s total annual economic output, marking the highest percentage spent on defense since the end of the Cold War. Europe in particular experienced a boost: defense budgets in 18 of the 32 NATO countries have reached 2% of gross domestic product (GDP) in the meantime, and new projects have filled the order books of European arms manufacturers like Airbus, Rheinmetall, and BAE far into the 2030s. Forecasts even indicate that all of the NATO member states will reach the 2% target for 2025. Moreover, NATO has set itself an ambitious long-term goal of raising military spending to an average of 3.5% of GDP by 2035. This stepped-up commitment underscores the strategic importance of the defense industry and opens considerable opportunities for those investors who grasp this shift as a long-term investment story.

Arms buildup | Rapid increase in defense spending

Number of NATO members with defense spending equal to 2% of GDP or more

Sources: NATO, Kaiser Partner Privatbank

There is more than just a security policy response behind those figures. Defense today is being understood again as an industrial value driver, an engine of innovation, a guarantor of employment, and a political signal. The defense industry is experiencing a structural renaissance driven by geopolitical uncertainty, technological innovation, and institutional capital that is increasingly willing to position itself between these poles.

Security comes at a price | And these countries are paying it

Share of worldwide military spending

Sources: SIPRI Military Expenditure Database, Kaiser Partner Privatbank

Europe’s secure boom…

In Europe, industrial policy and defense are increasingly becoming intermingled. Countries that for decades had lived off the peace dividend are now drawing up new funding programs, speeding up procurement processes, and strengthening their industrial sovereignty. The EU defense fund is channeling capital, joint initiatives are harmonizing standards, and national programs are creating production capacity. This is all aimed at establishing a new industrial base set up for the long term and not just for ad hoc responses to sudden crises. Defense is no longer being understood as a rare exception, but instead as a structural element of European economic strategy. Security is thus becoming an investable concept. For capital markets, this means predictability. For businesses, it means profit margin stability. And for investors, it means a new narrative.

…and its faultlines

But this is precisely where the danger lies. When security becomes an investment theme, the line between defense and profits becomes blurred. And EU member states are not all following the new charted course. In Italy, for instance, pacifist groups and legality concerns are hindering the EU’s plan to ramp up ammunition production directly with EU funding. To some, that would mark a break with the European vision of peace, whereas others view upholding that ideal as clinging dangerously to a past that cannot be resurrected. Europe’s security architecture is coalescing at the industrial level, but remains fragmented politically. But that’s just the visible surface. Behind the debates on strategy, there’s a second, quieter discussion underway about the material rudiments of defense, i.e. about supply chains, production capacity, and technological know-how.

Arms rally | The sector outpacing the broad market

MSCI Europe vs. defense stocks (in USD, 100 = outbreak of war in Ukraine on February 24, 2022)

Sources: Bloomberg, Kaiser Partner Privatbank

Economics of Defense

While developments on the war front dictate the headlines of the day, in the background there’s a supply chain operating in overdrive. Gunpowder, semiconductor chips, software, satellites, logistics. The modern defense industry is globally intermeshed, even in areas where policymakers promise autarky. This also explains the rise in share prices in recent years: Rheinmetall, Leonardo, and Thales are no longer niches stocks and have become growth stories. But the economic impact of stepped-up defense spending is less clear-cut than order books seem to suggest. Research has shown that although military spending generates demand in the short run, it does not automatically strengthen productive capacity. It is stimulative, but not necessarily transformative. So, what decisively matters is not how much money gets invested, but to where that money flows. If funds are tied up in obsolescent platforms, that does little to build a future. However, if resources flow to technologies with dual-use applications beyond military contexts (sensor technology, robotics, cyber defense, communications), this sets cycles of innovation into motion, and defense becomes the mainspring of technological modernization.

“King of the Mountain” prize | The climbers in the arms rally

Year-to-date performance (as of November 19, 2025)

Source: Bloomberg, Kaiser Partner Privatbank

The startup front

In the midst of the general upturn in the defense industry, demand, too, is changing fundamentally, shifting away from traditional heavyweights like tanks and artillery and toward high-precision, autonomous, and technology-based solutions. The conflict in Ukraine is acting as a catalyst of innovation that is steering the focus more toward AI-assisted targeting systems, drone swarms, and electronic warfare. Seminal impetus is increasingly coming not from state-owned arms manufacturers, but from the private sector, particularly from agile startup companies that have shrewdly positioned themselves at the intersection of software development, sensor technology, and security solutions. The inflow of capital has been impressive: according to a study by McKinsey & Company, venture capital allocated to defense tech in Europe increased 500% between 2021 and 2024. This dynamic momentum is not only generating technological diversity, but is also rearranging the competitive landscape. This change is nowhere more visible than in the field of drone technology. In Germany, for example, a network of young enterprises is working together with Rheinmetall on a new generation of loitering munitions, i.e. drones capable of tracking down and attacking targets autonomously. The startups supply sensors, software, and artificial intelligence, and Rheinmetall supplies the platform. What’s being built here is not merely a new weapons system, but a new industrial ecosystem because the future of defense will no longer be cast in steel alone, but will also be programmed in computer code. It will be defined in data, trained in algorithms, and conducted by networked swarms. The frontline of power no longer runs along fortified borders, but in the control logic of autonomous systems, and it is adjacent to technologies that shape civilian life in our cities, factories, and networks. Defense will become an engine of innovation here.

Innovation in security technologies | Startups in the USA are attracting the most venture capital

Venture capital funding of defense startups in NATO countries (2018–2024)

Sources: Dealroom.co, Kaiser Partner Privatbank

The moral compass of the markets

It was a long-held tenet that arms production is unsustainable. Period. But this moral clarity is starting to crumble. Security, the new argument goes, is a public good itself and thus a part of sustainability. A shift is afoot also in the investment fund landscape: while ESG funds continue to underweight the arms industry, a growing minority is warming to the sector. Some apply a best-in-class principle while others differentiate between defensive technologies and offensive weapons. A third approach combines the two by excluding controversial weapons but allowing dual-use technologies. This is more than a semantic trend – it shows that the very concept of sustainability itself is being contested. After all, what does responsibility mean when security becomes a precondition for reaching all other goals?

Security as a growth engine

The defense industry today is more than just a government contracts sector. It drives technological advancement, creates opportunities for startup companies, and ties industrial policy, capital markets, and security policy together. Investments in cyber and sensor technologies, robotics, and artificial intelligence produce not just military solutions, but also accelerate innovation in the civilian economy. Even symbolic steps like the renaming of the US Department of Defense by the Trump administration shows how tightly language, politics, and industry are interwoven with each other. This is bringing a quiet but powerful infrastructure of the future to life that strengthens technological and economic resilience. The defense theme remains challenging for investors because opportunities and risks here are closely connected. The sector’s structural importance is increasing, but the right way to approach it as an investor depends greatly on one’s investment needs and personal stance on the defense theme. Your investment horizon, your tolerance for risk, your personal understanding of sustainability, and the composition of your portfolio determine whether and how large of a position may be sensible. There is no one-size-fits-all recommendation. It is crucial to thoughtfully analyze your personal context and to have a clear idea of what role the defense theme is to fill in your portfolio.