After defence stocks rally, these sectors could drive the next five years for investors

Vijay Valecha, Wed, Aug 12, 2026 Gulf News

Military spending is rising, but the investment trade is spreading well beyond defence

Dubai: Defence stocks have become one of the most obvious market winners from the current geopolitical cycle, but the bigger investment story is starting to move beyond weapons manufacturers.

Higher military budgets are feeding into drones, cybersecurity, aerospace and surveillance, while the same geopolitical pressures are pushing governments to spend more on energy security, electricity grids, data centres and critical infrastructure. Investors looking for the next leg of the trade are increasingly watching that wider ecosystem.

The comparison with pharmaceuticals during Covid is an easy one. Both themes were propelled by a crisis that forced governments to spend, but the similarities may end there.

Global military expenditure reached $2.89 trillion in 2025, up 2.9% in real terms and marking an 11th consecutive annual increase, according to figures cited by Vijay Valecha, Chief Investment Officer at Century Financial. Spending outside the US rose 9.2%, while European military expenditure climbed 14% to $864 billion.

It is true that defence stocks can play a role similar to pharma's during the Covid cycle. However, there is one critical difference: defence is becoming a structural theme rather than a short-term event-driven investment theme

This is also reflected in the longer-term commitments being made by governments. NATO members have agreed to substantially increase defence and security spending over the coming decade, while European allies and Canada raised defence expenditure by nearly 20% in real terms in 2025.

"There are certainly parallels, but there is an important difference. Pharma during Covid was driven by an immediate global health emergency, while defence is increasingly being supported by a longer-term structural shift in government spending," he said.

The most visible beneficiaries are defence contractors, but the spending is spreading into areas that sit around the traditional military supply chain.

Drones have become a bigger part of modern warfare because of their relatively low cost and ability to conduct strikes, surveillance and intelligence operations. Valecha estimates the total addressable market covering drone hardware, services, AI and software could expand from about $45 billion today to $400 billion globally.

That creates opportunities for newer defence technology companies alongside established contractors involved in missiles, interceptors, shipbuilding and aircraft.

Cybersecurity is developing into another major part of the security trade. Valecha expects the sector to grow at a compound annual rate of 13.8% between 2026 and 2034 as governments and companies spend more to protect increasingly digital defence and national-security systems.

"The broader security ecosystem may actually be one of the more interesting areas to watch. Modern security spending is increasingly about technology, data and infrastructure, not simply conventional military equipment," he said.

Power grids, telecommunications networks, data centres, ports and supply chains are becoming part of national-security planning, bringing a much wider set of companies into the investment conversation.

Geopolitical risk is also forcing investors to rethink energy.

The Strait of Hormuz carries about 20 million barrels of oil a day, close to a fifth of global supply. Brent began 2026 near $61 a barrel and has since risen about 37% to around $88, according to Valecha, after touching $120 during the most intense phase of the conflict.

"Six months into the US-Israel war on Iran, energy has become the queen on the chessboard, the piece with the most reach and the most power over the game," Valecha said.

The same infrastructure constraint is beginning to reshape the AI trade.

Semiconductors have dominated investor attention, but the next stage of AI spending may increasingly centre on the systems needed to support them.

Data-centre electricity consumption is projected to almost double from 485 TWh in 2025 to 950 TWh by 2030, according to figures cited by Valecha. That means more demand for electricity generation, grids, cooling and networking.

Optical networking is another area drawing attention. Valecha cited forecasts for the AI optical-networking market to grow ninefold to $154 billion, with co-packaged optics accounting for about $91 billion of that opportunity.

CPU demand could also rise as AI workloads move from training towards inference and autonomous agents. The addressable market for data-centre CPUs could increase from around $50 billion today to $100 billion by 2030.

There are also ways to gain exposure to geopolitical risk without owning defence stocks.

Valecha points to gold, shipping, marine insurance, energy companies, LNG suppliers, critical minerals and safe-haven currencies.

Central banks bought 244 tonnes of gold in the first quarter of 2026, while disruption around major trade routes has pushed up freight rates and war-risk insurance costs.

Critical minerals are also becoming part of the security debate as governments try to reduce dependence on vulnerable global supply chains.

Gulf News