The Global Defense Spending Boom: A New Era of Military Modernisation

Introduction

Global defense spending is entering a strong growth cycle as geopolitical tensions and technological advancements reshape military priorities. Conflicts in Ukraine and the Middle East, along with strategic competition between the U.S., China and Russia, are driving higher military budgets and modernisation. The combined market opportunity across air defense, space defense, and hypersonic weapons could reach $800 billion–$1 trillion over the next five years, with space defense alone exceeding $600 billion.

From an investment perspective, the sector remains structurally bullish. The U.S. defense budget request exceeds $1.01 trillion, while NATO countries aim to increase spending toward 3.5% of GDP. Air and missile defense alone could add $300 billion+ in industry spending, supporting long-term growth for global defense contractors. Northrop Grumman is a leader in unmanned aerial systems and space-based defense platforms, while RTX Corporation plays a key role in air and missile defense as well as counter-drone technologies. L3Harris Technologies provides critical ISR sensors and electronic warfare systems used in modern drone operations, while Lockheed Martin continues to drive innovation in missile defense, autonomous systems, and next-generation aerospace platforms.

Global Defense Spending Outlook

Large-Cap Defense Picks

Source: Bloomberg
*Last Price as of 11th March 2026

Drones in Defense - Top Picks

Source: Bloomberg
*Last Price as of 11th March 2026

European Defense - Top Picks

Source: Bloomberg
*Last Price as of 11th March 2026

Aqua Defense Contractors

Source: Bloomberg
*Last Price as of 11th March 2026

Defense-linked Rare-Earth Beneficiary

Source: Bloomberg
*Last Price as of 11th March 2026

Global Defense Thematic ETFs

Source: Bloomberg
*Last Price as of 11th March 2026

Rise of the Drone Warfare: U.S. as a Catalyst and Enabler

Drone demand is strengthening across both U.S. and international markets. The U.S. FY26 Defense Appropriation Bill saw total FY26 unmanned funding of ~$2 billion, rising to nearly ~$13 billion when including OBBB (One Big Beautiful Bill) related allocations. These would soon be formally awarded and deployed. The industry remains in the very early innings of a multi-year investment and production cycle. The drone sector is expected to skyrocket from $45 billion to $400 billion over the next decade at a 15% CAGR, and the Unmanned Aerial Systems (UAS) segment is expected to capture 10-15% of this market.

Key subsectors to benefit include: ISR (Intelligence, Surveillance, and Reconnaissance), Strike and Combat (Unmanned Combat Aerial Vehicles, Loitering Munitions), Counter-UAS (C-UAS).

Across the supply chain, component and subsystem providers would also benefit. These include camera and vision tech for drones, data and analytics, and communication systems. The reshoring of supply chains is a key priority for the U.S. The FCC ban on foreign-made drones and components is still active, and hence component suppliers are looking to build a strong domestic base to meet accelerating demand from OEMs.

Investors can also gain broad exposure to the drone and defense technology ecosystem through the following thematic ETFs:

Europe’s Defense Surge: A Rapidly Expanding Military Market

European countries are increasing defense spending to meet NATO's 3.5% of GDP target, fueling growth in the sector. This trend is likely to continue as Europe invests more in local production and governments accelerate funding for next-generation drones, autonomous systems, and military infrastructure. With rising geopolitical tensions due to recent conflicts in Ukraine and ongoing tensions in the Middle East, unmanned systems are becoming a key part of defense strategies. Specifically, within the European defense theme, the military drone market is projected to grow at a 26.8% CAGR, rising from $7.95 billion in 2024 to over $85 billion by 2034. This makes it one of the fastest-growing areas in Europe's defense industry.

A key focus for the region is to become more self-reliant, thereby reducing its dependence on foreign suppliers while building up its own defense capabilities. Leading defense companies are growing their unmanned technology offerings. Thales Group plays a key role in Europe’s drone ecosystem through advanced ISR systems, avionics, and battlefield communication technologies, while Rheinmetall and BAE Systems are investing heavily in drones, loitering munitions, and AI-powered battlefield technologies.Renk Group is a key supplier of high-performance transmissions and propulsion systems for military vehicles and naval platforms. With support from EU programs such as the European Defense Fund, Europe is gradually building a self-sustaining defense and drone ecosystem.

Rare Earths Powering Defense Demand and Global Supply Realignment

The ongoing geopolitical developments have reinforced the urgency of achieving independence from rare-earth supply, given their importance to weapon systems and motors. Rare earth elements sit at the intersection of geopolitics and military capability. Advanced U.S. defense systems, from F-35 fighter jets (which require roughly 920 pounds of rare-earth materials) to missile defense platforms like Patriot and THAAD, depend heavily on these minerals for magnets, radar, targeting systems, and guidance technologies. Military needs for these elements will take precedence over uses like renewable energy or electric motors as NATO countries boost defense spending. US-based MP Materials and Australia’s Lynas Rare Earths are the leading miners of neodymium-praseodymium (NdPr) outside China, which accounts for most of the rare-earth market value.

Aquatic Defense: Mining the Opportunity

Iran's mining of the Strait of Hormuz has forced a hard realisation on every naval command watching: the underwater battlefield is no longer theoretical. Iran's mines are built from non-magnetic composites, rendering legacy magnetic sweeping useless. Clearing them requires high-resolution sonar, autonomous underwater vehicles, and real-time imaging in zero-visibility water. This is a current-event driven opportunity — the kind where a single geopolitical catalyst re-rates an entire niche sector overnight. That technology sits with a handful of firms most of the market has never heard of, and the capital hasn't moved there yet.