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

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.

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.

Jaafar Hachem, Founder and Managing Director of Zentara Solutions, said the spending cycle could therefore outlast individual conflicts.

"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 trade is moving beyond weapons makers

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.

Hachem sees the opportunity extending even further into infrastructure that would once have sat outside a conventional defence portfolio.

"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.

Energy becomes a security trade

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.

Oil is only one part of that story.

Governments seeking to reduce exposure to supply disruptions are also spending on LNG, nuclear generation, storage and electricity grids. The IEA expects global energy investment to reach around $3.4 trillion in 2026, according to figures cited by Hachem, including nearly $1.6 trillion in electricity supply and infrastructure. Grid investment alone is projected to approach $550 billion.

That creates a different route for investors who do not want to make a direct call on crude prices.

"Energy security has become a strategic priority again. The recent disruptions have reminded governments that energy policy is not simply about price or sustainability; it is also about reliability and independence," Hachem said.

Utilities could benefit from that shift as higher electricity demand requires more spending on generation and networks, while nuclear energy is attracting renewed interest from countries seeking stable domestic supply.

AI's next winners may not be chipmakers

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.

Hachem expects that infrastructure layer to become a bigger part of the AI investment story over the next three to five years.

Space and healthcare join the watchlist

Valecha also sees space and healthcare developing into longer-term themes.

The global space economy was estimated at about $613 billion in 2024 and could reach $1.8 trillion by 2035, helped by the growth of commercial satellite launches and other private-sector activity.

Healthcare has a different driver. The global population aged 60 and above is projected to rise from 1.1 billion in 2023 to 1.4 billion by 2030 and 2.1 billion by 2050, expanding the potential market for treatments targeting diseases linked to ageing.

AI is also speeding up parts of drug discovery, giving investors another route into the technology cycle without relying entirely on traditional software or semiconductor companies.

The challenge is separating an attractive theme from an attractive stock.

Valuations remain the bigger risk

Defence stocks have already delivered strong gains.

The US Defence Basket has returned 16.35% year to date and 11.62% over three months, according to Valecha. The Global Defence Basket has returned 5.28% over both periods.

He argues those gains do not yet signal an extreme valuation. The industry's 12-month forward price-to-earnings ratio stands at 35.08, below a recent cycle peak of 39.26.

The bigger risk, in his view, is whether the large order books now being accumulated can translate quickly enough into cash.

Germany illustrates the problem. Defence contractors can complete equipment but still face delays before formal delivery because of testing and certification requirements, slowing revenue recognition even when factories have done their part.

Hachem is more cautious about the level investors are paying for individual names after several years of strong gains.

"One of the most common investing mistakes is identifying the right trend but entering at the wrong valuation," he said.

BAE Systems, for example, has gained roughly 283% over five years, showing how much of the expected increase in government spending can already be reflected in share prices.

Investors therefore need to look beyond headline contract values and examine margins, cash generation, order-book quality and the speed at which procurement turns into earnings.

Geopolitical investing without buying defence

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.

Hachem sees all of these opportunities as part of a broader investment theme centred on resilience.

"The key point is that geopolitical investing does not have to mean betting on war. The larger structural theme is resilience—countries and companies spending more to secure their energy, technology, infrastructure, supply chains and digital systems," he said.