War footing ⚔️

War, what is it good for? For most of the post-Cold War era, defence sat at the edge of markets. But since Russia’s invasion of Ukraine, war in the Middle East, attacks on Red Sea shipping, and the wider rearmament push across NATO, defence has become hard to ignore.

Governments are spending more. Contractors are carrying bigger order books. Startups are raising money. ESG investors are rethinking exclusions. Will bond markets be asked to help fund the bill?

Spend, spend, defend

The UK has committed to increase NATO defence spending from 2.4% to 2.5% of GDP by 2027, or 2.6% when additional security and intelligence spending is included. War bonds have been mooted as one way of helping fund that increase.  

These spending hikes are part of a wider trend. By 2035, NATO members should be spending 5% of GDP on core defence and broader security-related spending. European allies and Canada have more than doubled their annual defence spending in real terms since 2014, with a 106% increase over that period. 

Stockholm-based defence think tank SIPRI says global military expenditure reached $2.718 trillion in 2024, up 9.4% in real terms from 2023, the steepest annual increase since the end of the Cold War.

Defence dividend

At least £1.4 billion of foreign investment into UK defence has been announced since July 2024, linked to more than 1,700 new jobs. A 2025 Norway-UK deal over Type 26 frigates was worth £10bn and is set to support thousands of high-skilled jobs for 15 years and beyond.

In the new climate, the UK’s homegrown defence sector is buoyant. BAE Systems reported 2025 sales of £30.7bn, with an order intake of £36.8bn and order backlog of £83.6bn. Babcock reported FY25 revenue of £4.831bn, with 74% of that tied to defence, and a contract backlog of £10.4bn. Rolls-Royce is more diversified, but its 2025 results revealed defence delivered an underlying operating margin of 14.4%, and it highlighted the role of its submarines business in supporting the Royal Navy’s programmes and wider UK defence nuclear enterprise.

Home of the brave

The global defence market is still dominated by American firms. Lockheed Martin reported 2024 net sales of $71bn and said its backlog reached a record $176bn. RTX reported 2025 sales of $88.6bn and a backlog of $268bn, including $107bn in defence. Northrop Grumman reported 2025 sales of $42bn.

These are the benchmark names in the sector and they matter because the US remains the largest defence spender in NATO and because allied procurement often depends on US platforms, systems, and supply chains.

The term military industrial complex was coined by President Dwight Eisenhower in his 1961 farewell address, where he warned against the “unwarranted influence” of the military on civil society, which could lead to the military shaping politics and the economy in self-reinforcing ways.

Defence is not a normal sector. Governments are often the customer and rule-maker all at once. Big budgets create big contractors. Big contractors create jobs, supply chains, and lobbying power. All those things can make future budgets harder to cut.

Defence procurement is therefore expensive and often politically difficult to control. The UK’s National Audit Office said the Ministry of Defence’s 2023-2033 Equipment Plan was unaffordable, with costs exceeding the available budget by £16.9 billion, which could rise to £29.8 billion if all risks materialised. 

Softwar

Governments these days want cheaper, faster, and more nimble systems, especially after seeing how drones and software have shaped the war in Ukraine. 

For years, Silicon Valley tech companies and investors kept the Pentagon at a distance, partly because defence contracting was slow and complicated, and partly because weapons raised ethical problems for employees and customers. That has changed. Wars in Ukraine and the Middle East, alongside China’s military rise, have pushed more US tech investors and companies toward defence technology.

Many newer defence firms are now selling a different kind of defence product: drones, AI, sensors, surveillance systems, battlefield software, and autonomous platforms. Anduril builds autonomous systems linked by its Lattice software. Helsing builds AI defence software and strike drones. Quantum Systems makes reconnaissance drones. Tekever makes long-range surveillance drones used for maritime patrol, border monitoring and search and rescue.

In 2025, Anduril raised $2.5bn at a $30.5bn valuation, nearly doubled revenue to $1bn in 2024, and had about $1.5bn of contracts. Europe’s Helsing raised €600m in 2025. Quantum Systems raised €160m and reached unicorn status, while Portugal’s Tekever also crossed the €1bn valuation mark. European defence-tech startups have raised more than $3bn in all-time equity funding, with annual equity inflows rising from $2 million in 2016 to $1.1 billion in 2025 year-to-date.

Echo Sierra Golf

For years, many ESG funds held arms makers at arm’s length. Even while governments depended on these firms for national security. That position has become harder to sustain as defence budgets have risen and European security has deteriorated, although many sustainable funds already had some defence exposure.

In December 2025, the European Commission said the EU sustainable finance framework does not prescribe any exclusions on financing defence-related activities and is compatible with investing in the sector. It also said the framework sets no limitations on financing any sector, including defence, and that investments should be assessed case by case.

War on credit

Defence companies depend on state spending. States, in turn, often depend on investors willing to lend. War bonds are but one way to pay for war. States have used some mix of borrowing, taxation, money creation, and cuts elsewhere. Borrowing is often the fastest route because it raises large sums quickly, but it also leaves a long financial tail.

The financial legacy of the First World War was still visible on the government balance sheet almost a century later. The 5% War Loan issued in 1917 was converted in 1932 into a 3.5% War Loan as part of Neville Chamberlain’s campaign to reduce the cost of servicing the national debt.

Holders could still apply for cash repayment, or continue on altered terms. But the state was effectively using its power and patriotic pressure to lower the coupon on a huge wartime debt. Some might call that a default.

A modern UK defence bond would probably look more like a labelled savings or debt product than a historical war poster campaign. One route would be a gilt sold mainly to institutional investors, with proceeds linked to defence-related spending. Another would be a retail savings product distributed through NS&I, which is backed by HM Treasury and has more than 24 million customers.

Pricing war

Stock prices tend to decline significantly during major geopolitical risk events. A 2025 analysis showed the average monthly drop in stock returns is about 1 percentage point across countries and 2.5 percentage points in emerging markets. For international military conflicts, the average monthly drop in emerging market stock returns is 5 percentage points.

Sovereign risk premiums rise after geopolitical events by about 30 basis points in advanced economies and 45 basis points in emerging markets, and there are spillovers through trade links: stock valuations fall by about 2.5% when a main trading partner becomes involved in an international military conflict.

That broad pattern does not mean markets always simply collapse in wartime. Research looking at the US stock market during the Civil War, World War I, and World War II found that the market rose overall during the Civil War and World War II and fell overall only in World War I.

War and rearmament can also drive economic booms. The most extreme historical example is Nazi Germany, where rearmament was central to the recovery from Weimar-era hyperinflation. The economy was pushed by state spending, conscription, public works and military production, but it also relied on coercion, repression, debt, controls and ultimately conquest. Rearmament can lift output and employment while making the wider economy more distorted and more dependent on state direction.

Your country needs you

The number of armed conflicts globally hit 61 in 2024, the highest level since the end of the Second World War. That is up from the mid-50s just a few years earlier. War is not necessarily more deadly than in the 20th century’s worst moments. But it is more diffuse and more persistent.

At the same time, rearmament has to be paid for and the UK has little fiscal wiggle room. Public sector borrowing in February 2026 was £14.3bn, the second-highest since monthly records began in 1993. The OBR says public sector net debt in February stood at 93.1% of GDP.

War is no longer abstract and distant. Conflicts are affecting trade routes, budgets, supply chains and investment decisions all at once. The peace dividend is over. The defence dividend is here.