Investing in Defense: Heading into the Next Phase?

By Roberto Magnatantini

At Decalia, we advise our clients on how to navigate this rapidly evolving sector and capture opportunities within the defense super-cycle. The following Frequently Asked Questions provide further context and highlight where we see the strongest investment potential.

What drives the Defense theme?

First, geopolitics. Since WW2, the UN had more or less upheld the rule against territorial conquest. The full-scale invasion of Ukraine shattered this equilibrium, exposing the UN’s powerlessness when a permanent member and major nuclear power wages war. The U.S. is also recalibrating its role in the «rule-based order,» meaning countries that long outsourced their protection must now build their own capabilities.

Second, technology. AI and unmanned systems are revolutionizing combat. At the start of the Ukraine war, battles resembled Cold-War models with waves of mechanized units advancing under close air support. This quickly became obsolete: ubiquitous sensors, AI data management and drone warfare made massing forces nearly suicidal as any detected asset can be almost instantly targeted. Doctrines must be rewritten and arsenals retooled, as much current equipment is outdated.

Is it too late to invest?

We don’t think so. The «peace dividend» after the Soviet collapse left many Western aligned armies quite literally bled dry. Rearmament will be a decades-long effort, with multi-year contracts for complex systems. Demand is global: while Europe gets the spotlight, Asia also notably faces mounting pressure from an increasingly assertive China.

Valuations have risen, but earnings and order books are expanding fast, implying rapidly falling multiples. New technologies will also create niche leaders with outsized growth. Our favorite areas include data analytics, counter-drone tech, missile interception, autonomous maritime patrol and land systems retrofits to name a few.

Can Europe afford its plans?

While Europe faces fiscal constraints, several options exist to fund its defense commitments. First, countries like Germany still have significant room to raise debt, especially for strategic investments. Second, defense spending is increasingly seen as a lever to promote reindustrialization, thus supporting job creation and technological innovation. Third, seizing part or all of the $300 billion of Russian assets currently frozen in Western coffers could also help finance rearmament, but this will be politically and legally thorny.

Should investors focus only on Europe?

Europe is currently the fastest-growing market, but a global approach is wiser in our opinion. Defense budgets are rising everywhere, with national champions enjoying government backing, like Mitsubishi Heavy in Japan or Korea Aerospace. Cutting-edge areas like lasers, hypersonics, and AI also often advance faster outside Europe. Lastly, diversification effectively mitigates risks, as correlations between sub-themes and regions remain limited across Defense.

What if peace comes in Ukraine?

A ceasefire could trigger a temporary correction in European defense stocks, but it would likely only mark a pause. Re-equipment plans would nevertheless remain intact, as Moscow’s ambitions are too entrenched to restore a peaceful worldview.

Why Decalia’s Defense strategy?

At Decalia, we have a strong expertise in the Defense sector. In March 2024 we launched our own strategy to meet client demand, as existing alternatives were too US-centric, too civilian-exposed but also too often «black-box.» Small-and mid-caps, rich in opportunities, were also underrepresented. We thus built a transparent, high-conviction, bottom-up portfolio focused on companies best positioned to supply the systems modern armies need. Since launch, the strategy has delivered on its mission, substantially outperforming its peer group.

From an ESG perspective, is Defense acceptable?

From an ESG perspective, most defense companies score well. The real debate is ethical, as some investors still see defense as incompatible with sustainability. Yet perceptions are shifting rapidly: the Ukraine war underscored the role of defense in safeguarding peace, democracy, and human rights. Institutions are responding: EIB now finances dual-use projects, the EU is considering defense under its sustainability taxonomy and major investors like the Norwegian SWF and Dutch ABP have eased restrictions. Across asset management, a growing consensus holds that without security, long-term environmental and social goals cannot be achieved, recognizing defense as a prerequisite for sustainability.

Roberto Magnatantini, CFA, is an expert in defense industry and the Lead Portfolio Manager of Decalia Aegis Defense strategy. 

Decalia is a leading Swiss wealth manager, overseeing and advising assets for private and institutional clients alongside a range of high value-added investment funds. Its activities focus on three core areas: asset management, wealth management, and private markets.

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