The mechanics have finally started, but it will be years before our level of preparation is sufficient to guarantee peace for future generations.
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The argument most frequently put forward to justify a lack of exposure to the defense sector can be summed up in one sentence: “it is too late”. The markets would have already factored in the increase in military budgets and the potential for appreciation would therefore now be limited.
This reading is based on the hypothesis of a short cycle. Now, to paraphrase Churchill, what we are currently experiencing is neither the end, nor even the beginning of the end of the cycle… but probably just the end of its beginning.
Investors, like Western governments, have finally begun to accept the idea that the geopolitical environment has permanently changed. But the threat still remains largely underestimated, as we have been content to deny it. And this, while after decades of underinvestment, entire regions are today defenseless against threats that are evolving at an unprecedented pace. The mechanics have finally started, but it will be years before our level of preparation is sufficient to guarantee peace for future generations.
Investment decisions are therefore firstly political, part of a logic of sovereignty, then broken down into industrial programs which are often deployed over several decades. This long time frame is a double-edged sword for investors: on the one hand it gives players in the sector excellent visibility but it also results in transitional phases where the multiples appear excessive, because the profits take time to materialize.
In this context, reducing the current movement to a simple stock market “rerating” amounts to ignoring the depth of the current cycle. The reconstitution of military capabilities is part of a lasting regime change, marked by the end of the “peace dividend”, geopolitical fragmentation and the ongoing technological revolution.
This is mainly linked to the advent of AI and autonomous systems, which force armies to reinvent themselves. Investments will increasingly focus on technology-intensive segments, which will create extraordinary investment opportunities, but will also generate losers among traditional players who will not be able to adapt.
In this context, the central question is therefore not the timing of investment in defense, a secondary concern in a long-term cycle, but rather the identification of segments and companies capable of creating the most value in a rapidly developing theme.
