Charlotte de Kerpoisson:

In spite of the calming of the U.S.-Iran conflict in recent weeks, defence remains a hot investment theme, given the rising needs of European NATO members to increase defence spending. Since the beginning of the year, the Bloomberg Europe Defence Index has gained over 10%, following a stellar performance in 2025. Welcome to this podcast by BNP Paribas Wealth Management. I'm Charlotte de Kerpoisson. To discuss this topic, I'm joined by Edmund Shing, Global Chief Investment Officer. Hello, Edmund. 

Edmund Shing: 

Hello, Charlotte. 

Charlotte de Kerpoisson:

What are the main drivers behind the resurgence in interest in the global aerospace and defence sector, Edmund? 

Edmund Shing: 

Well, for one thing, Charlotte, the recent conflict in Iran is a big driver of defence. Notably, the fact that in two months a huge amount of missiles and other armaments have been used up, which will take actually years to fully replace. If we take for an example the usage of patriot missiles, which are actually defence missiles, anti-missile missiles, as it were, these cost around three million dollars per missile. And in the two months of the conflict in the Gulf, about three to four years' worth of production of these patriot missiles has been used up. So it's going to take us several years to rebuild the stockpiles of these patriot missiles to where they were before the conflict. So that's one driver. 

Second driver, clearly, is the long-standing commitment of European NATO members to increase their defence spending as a percentage of GDP to well above two percent. The old target for NATO members was two percent of GDP spending on defence per year. Again, we should see European countries go more to three percent or even higher in the case of countries like Poland. And clearly, that increase in defence spending is a strong motor for the global aerospace and defence sector. 

Thirdly, and this is nothing to do with conflict, the global aerospace sector itself should benefit from continued growth in air transport and in terms of passenger kilometres travelled. Generally, this has been growing by something like six percent per year, with turbocharge growth coming from the Asian market. This is likely to continue, and it continues to drive demand for, of course, aircraft spare parts, maintenance, and other services related to related to aerospace. 

Charlotte de Kerpoisson:

How is European defence spending progressing? Should it continue to increase in the coming years? 

Edmund Shing: 

The answer is clearly yes. As I said, European NATO members are committed to increasing their defence spending from two percent of GDP closer to three percent, or in certain cases well above three percent, but they're not doing it all in one shot. This is a progressive increase in defence spending. For one thing, it takes time to scale up manufacturing of defence equipment. You can't just produce twice as many tanks from one day to the next. Clearly, as well, we are developing new technologies, so where the money is spent in defence is also changing. And this has been very neatly illustrated by the new mode of warfare presented not only by the Iran conflict, but more evidently from the Ukraine war.  The use of drones, for instance, which are relatively cheap, has shown us that this is a very effective mode of warfare. And both investment in military drones and also anti-drone technology are areas that, of course, require greater spending, but are still areas in development today in Europe. So, again, we do expect the spending to increase over time, but where it's spent, I think, is also shifting. We're seeing much more investment in these types of defence technology around drones, around satellites, around cyber security, rather than simply classic military hardware like missiles, bombs, tanks, and so on. 

Charlotte de Kerpoisson:

Aside from government defence spending, what is the outlook for the civil aerospace market? 

Edmund Shing: 

Well, as I said, we can see we can see continued growth to the point where, if you look at the main suppliers of civil airliners, that is Boeing and Airbus, they have multi-year order books full already. So, if you were to go to Airbus and say, " I would like to order a new A320neo airliner," you'll be waiting for several years because there, I think their order book is something like full for the next four years. 

And again, with these sorts of complex aircraft, they can't just ramp up production overnight because they depend on hundreds and hundreds of subcomponent suppliers who themselves need to ramp up production if Airbus is going to increase production at the rhythm at which they produce new commercial airliners. 

So there's a lot of constraint in the system. Order books are full, and what you are actually seeing within the civil aerospace market is we're seeing greater demand therefore for spare parts and for maintenance and retrofitting of second-hand aircraft because if you can't get a new aircraft, you are obviously going to go to the second-hand market or the leasing market and retrofit and maintain aircraft for longer. So, actually, the second-hand value of commercial aircraft like the A320 from Airbus is actually, if anything, maintaining its value or increasing value given the scarcity and the lack of availability of new airliners. That generally is a very strong, positive motor for the global aerospace sector. 

Charlotte de Kerpoisson:

What indirect ways exist to invest in the defence spending theme? 

Edmund Shing: 

Well, there are several. Clearly, the first way is to invest in defence-related companies. Those are military contractors in the US, Europe, and even Asia, and that can easily be done by funds and ETFs, for instance, in the global aerospace and defence sector, or the European defence sector. Related to this would be infrastructure, because when you invest in defence, you inevitably also need to invest in the supporting infrastructure, and that is, of course, transport, communications, energy, and logistics. So all of that tends to benefit when you invest more in defence, and this is a good indirect way to invest in the theme. European infrastructure and the US infrastructure has performed pretty well. We like infrastructure as an asset class, and this is one of the many drivers behind the consistent defensive growth of the infrastructure asset class. 

Charlotte de Kerpoisson:

And finally, should investors continue to hold funds and ETFs based on this defence theme? 

Edmund Shing: 

Absolutely, yes. Since February of this year, there has been sort of a short period of underperformance of both global and European defence funds and ETFs. But bear in mind that this came after a really rocket-fuelled 2025 performance, where the European defence sector rose something like 60%. And actually, in the year-to-date, both global aerospace and defence funds, and also European defence funds, such as that offered by WisdomTree, are up over 10% in euros year-to- date. So they're still delivering solid performance, and I think hold a lot of promise for the rest of this year and even into next year. 

Charlotte de Kerpoisson:

Thank you, Edmund. And thank you to our audience for following this podcast. Please like, share, and subscribe to our weekly podcasts. Do not miss our mid-year investment themes that we recently published. For more information about these and for all our investment strategy research, please visit our website. Goodbye.