Missiles, Budgets & Earnings: Global Defence Summer Update

[00:02] Tom Sleep:
Hello everybody, and thank you very much for joining us.

My name is Tom Sleep. Welcome to HANetf’s summer update on the global defence sector.

I’m delighted to be joined by three specialists covering three key geographies within the global defence story. We’ll hear from Jane Edmondson on the United States, Siddharth Batra on India and the Indo-Pacific, and Tom Bailey on Europe.

HANetf offers a broad range of defence ETFs, encompassing global defence, screened strategies and more targeted exposures including Europe, the US and the Indo-Pacific.

Rather than looking at the defence theme globally today, we want to take a geographical approach and examine how the investment case is developing differently across the US, India and wider Indo-Pacific, and Europe.

Jane, let’s begin with the United States.

[02:10] Jane Edmondson:
One of the most important things to highlight about the United States is simply the scale of its military spending relative to the rest of the world.

Global military spending is around $2.7 trillion, while the United States is spending close to $1 trillion on defence in 2026 – more than the next six countries combined.

There is also a proposed $1.5 trillion US defence budget for 2027.

US defence spending declined slightly in 2025, partly reflecting changes in direct military support for Ukraine, but the spending plans since then have increased substantially.

At the same time, the US defence posture has changed.

There is an increasing emphasis not only on traditional military capability but also on the future of defence, including artificial intelligence, cyber defence, robotics, autonomy and drones.

The proposed 2027 budget has not yet been passed by Congress, so the final amount could change.

However, even if the headline figure is reduced, the direction of spending is important.

There is a clear emphasis on the defence industrial base, including:

• critical materials and domestic supply chains;
• homeland defence;
• missile and counter-drone systems;
• maritime superiority;
• munitions;
• air and space superiority;
• next-generation military technology;
• artificial intelligence;
• autonomous systems; and
• drones.

There is also a significant requirement to replenish munitions and defence equipment following recent conflicts.

One particularly interesting area is the US Drone Dominance initiative, which is encouraging newer private-sector drone companies to compete for military contracts.

Drones can potentially offer a very different cost profile from traditional missile systems.

If military equipment is effectively disposable during conflict, there is a strong incentive to develop systems that can deliver capability at a significantly lower unit cost.

[06:50] Jane Edmondson:
We’re already beginning to see the impact within company earnings and order books.

Lockheed Martin and Northrop Grumman are central to the US missile-defence supply chain, including systems such as Patriot and THAAD.

Those systems may need significant replenishment.

Lockheed Martin reported around $20 billion in quarterly sales and a book-to-bill ratio of approximately 3.2 times, suggesting a strong order environment.

RTX also reported strong earnings and raised its full-year sales outlook.

Northrop Grumman reported a record backlog of around $105 billion, up more than 17%.

Kratos, which has considerable exposure to drones and next-generation defence technology, also reported strong revenue and earnings, while GE Aerospace delivered positive results.

Broadly, US defence earnings have remained strong.

There are two overlapping investment themes here.

The first is replenishment of existing equipment and munitions.

The second is the longer-term modernisation of defence, including autonomous systems, drones, counter-drone technology, AI and other next-generation military capabilities.

[09:13] Tom Sleep:
The $1.5 trillion budget is clearly an important part of the story.

How likely is it that the full amount is approved? Could this simply be an opening negotiating position that is ultimately watered down?

Jane Edmondson:
The final number could certainly change.

However, there are also costs that may not yet be fully reflected in the headline budget, particularly the cost of replacing equipment and munitions used during recent conflicts.

Inventory levels for systems such as Patriot and THAAD missiles have come under pressure, and those need to be replenished.

There may also be reconstruction and other associated costs.

So although we don’t know the final budget number, the broad direction is towards substantial defence expenditure.

Importantly, much of that spending is expected to be focused on future military technologies rather than simply personnel costs.

[11:30] Tom Sleep:
Thanks, Jane.

Let’s move to India.

The Indian defence story perhaps receives less attention among European investors, but India is becoming an increasingly important player.

Sid, what is driving the Indian defence market?

[11:52] Siddharth Batra:
India is one of the world’s fastest-growing major economies, but it also operates in a challenging geopolitical neighbourhood.

Although India has long had one of the world’s largest standing armies, historically the technology and equipment available to the armed forces were not always state of the art.

Military upgrades were often slow because of bureaucracy, political considerations and a procurement process that could be reactive rather than strategic.

Over roughly the last two decades, however, there has been a significant structural reset in Indian defence policy.

Defence modernisation has increasingly become a national priority.

Between financial years 2023 and 2026, India’s Defence Acquisition Council approved procurement worth almost $160 billion.

That is around 50% more than the approvals made during the previous ten years combined.

India’s defence budget has grown by approximately 7.5% annually over the last decade, and the rate of growth is expected to accelerate further over the coming five years.

Capital expenditure is also becoming a larger proportion of the defence budget.

Alongside higher spending, structural reforms have been introduced to improve procurement and coordination between different branches of the military.

The creation of the Department of Military Affairs and the position of Chief of Defence Staff has helped put military leadership more directly into strategic and procurement decisions.

There have been two particularly important policy milestones.

The first was the Make in India programme, launched in 2014.

The second was the Atmanirbhar Bharat, or self-reliant India, initiative launched in 2020.

Both are intended to reduce India’s reliance on imported military equipment and expand domestic manufacturing.

India’s revised defence acquisition rules require a significant proportion of procurement to come from domestic manufacturers.

As a result, purchases of domestically produced defence equipment have grown considerably over the past decade, while defence imports have declined.

The government has also issued a series of Positive Indigenisation Lists, identifying thousands of defence products that are increasingly expected to be sourced domestically.

Collectively, these programmes represent tens of billions of dollars of potential domestic procurement.

At the same time, India allows foreign direct investment of up to 74% in defence manufacturing, helping international companies participate in the development of the domestic manufacturing ecosystem.

India’s defence industry is no longer focused solely on meeting domestic demand.

Exports are increasingly important.

Indian defence exports grew around 60% in FY2026 to approximately $4.4 billion and have increased roughly fourfold over the past five years.

That means defence exports are now approaching the value of India’s annual capital imports of defence equipment.

One of India’s best-known exports is the BrahMos supersonic missile system.

Export agreements have been signed with several countries, while discussions have taken place with other potential buyers across Southeast Asia and the Middle East.

India has also signed a substantial defence package with Armenia, including the Akash air-defence system and Pinaka multi-barrel rocket launcher.

Recent conflicts have also provided an opportunity for several domestically produced Indian air-defence and counter-drone systems to be tested under real-world conditions.

So the investment story is increasingly supported by three factors:

higher domestic defence spending, greater indigenisation and rising exports.

[18:00] Tom Sleep:
India has a difficult relationship with Pakistan, while we’re also seeing changing defence relationships across the Middle East and Asia.

Does that make the case for Indian defence stronger?

Siddharth Batra:
If anything, it reinforces the rationale for modernisation.

India has faced security challenges involving Pakistan and China for many years.

The modernisation process accelerated following previous conflicts, and changes in regional military alliances only increase the strategic importance of continuing that investment.

[19:50] Tom Sleep:
India has historically sourced a great deal of military equipment from Russia.

Should recent procurement decisions be interpreted as India moving away from Russia, or is this primarily part of the indigenisation strategy?

Siddharth Batra:
India’s defence relationship with Russia is longstanding.

Much of India’s historical military equipment came from Russia, while systems such as BrahMos were developed collaboratively.

So I don’t expect that relationship to disappear quickly.

What has changed is that India is diversifying its defence partnerships.

Rather than being dependent on one major foreign supplier, India increasingly wants a broader group of partners alongside a much larger domestic manufacturing capability.

[21:30] Tom Sleep:
One concern sometimes raised by investors is whether indigenisation becomes simply an import-substitution policy.

How does India ensure domestically produced equipment still meets the necessary quality standards?

Siddharth Batra:
Indigenisation does not mean compromising on quality.

Defence procurement is subject to assessment by committees containing experienced military personnel, both current and former.

Domestic equipment still has to meet the requirements necessary for active military use.

The objective is to develop domestic capability while maintaining the required operational standards.

[22:35] Tom Sleep:
Tom, European defence was one of the major investment stories of 2025.

What has 2026 looked like so far?

[22:45] Tom Bailey:
The historic underspending story is already well understood.

The more relevant questions today are:

How quickly is European spending actually increasing? And are the fundamentals supporting European defence stocks?

Recent NATO figures show material increases in spending.

European NATO members and Canada are estimated to be spending around 2.5% of GDP on core defence in 2026.

Under the agreement reached at The Hague, members committed to moving towards 3.5% of GDP in core defence expenditure, alongside another 1.5% for broader defence- and security-related expenditure, including areas such as cyber and supporting infrastructure.

Broader security expenditure is already relatively close to that latter target.

The bigger gap therefore remains within core military spending.

European NATO members plus Canada are expected to spend more than $650 billion this year.

We’ve also continued to see large-scale procurement commitments, including spending on counter-drone technologies.

The important point is that Europe still has significant capability gaps to fill.

Spending has increased materially, but the longer-term targets imply further investment will be required.

That depends on what you look at.

There was a strong rally at the beginning of the year, followed by greater investor concern about valuations and whether defence companies could execute against rapidly expanding order backlogs.

Some of the largest names have experienced weaker performance.

But that doesn’t mean European defence equities as a whole have performed poorly.

At the time of this discussion, European defence stocks within our basket were up around 20% year to date.

Investor sentiment has become more selective than it was in 2025, but we have also recently seen improving broker sentiment and continued strength in earnings.

Valuation was one of the biggest concerns during 2025.

European defence stocks reached around 30 times forward earnings at several points during that year.

By the time of this webinar, that had fallen towards approximately 24 times, around 20% below those peaks.

At the same time, earnings growth remained strong.

The median 12-month EPS growth across the European defence basket was approximately 26%, compared with around 15% for the Nasdaq using the comparison presented during the webinar.

Of 28 portfolio companies, 17 had reported their second-quarter results at the time of the discussion.

Across those companies, reported earnings growth was strong and results collectively came in ahead of expectations.

So there has been a degree of valuation normalisation while the underlying earnings story has continued to develop.

[29:10] Tom Sleep:
Jane, one of the other stories we’ve seen in the US is increasing political pressure on major defence contractors around capital allocation, production and value for taxpayers.

What does that mean for the established defence primes?

Jane Edmondson:
There is certainly greater pressure on the traditional primes to become more efficient.

At the same time, they’re increasingly competing with a new group of more disruptive defence companies, particularly in areas such as drones.

The US government is focused on return on investment and increasing production capacity.

Established contractors therefore need to modernise and become more cost competitive.

The smaller companies, however, face a different challenge: scale.

They may have attractive technologies, but building enough production capacity to compete for large defence contracts can take considerable investment.

Government programmes encouraging drone procurement are helping bring these newer companies into the defence supply chain and increasing competitive pressure across the industry.

That potentially raises the bar for the established primes as well.

[32:45] Tom Sleep:
Tom, is there anything you’d add on the emerging drone companies?

Tom Bailey:
One area worth considering is the increasing effort to localise drone supply chains.

Rules around defence procurement already restrict the use of certain foreign-made technologies, and we’re seeing greater scrutiny extend into commercial and security applications as well.

That potentially benefits US-based companies such as Ondas, which has expanded through acquisitions and focused on establishing more localised supply chains.

The opportunity is also broader than the military.

Counter-drone technology is increasingly relevant to airports, major sporting events and other critical infrastructure.

Ondas has exposure to those markets as well.

The company has been growing revenues rapidly, although it’s important to remember that these remain relatively early-stage businesses and profitability can still be challenging.

So the potential growth is substantial, but so are the execution risks.

[35:30] Tom Sleep:
Sid, coming back to India, in an increasingly multipolar world there would presumably be a wider range of potential buyers for Indian defence equipment?

Siddharth Batra:
Yes.

A significant proportion of Indian defence exports has gone to countries across Southeast and Central Asia.

BrahMos has been an important export product, with customers and potential customers across the region.

Armenia has also become a significant buyer of Indian defence equipment through a broader package including rocket launchers and air-defence systems.

There are also smaller exports – ammunition, components and other equipment – going to developed countries including Australia, the US and parts of Europe.

So exports are becoming an increasingly diversified part of the Indian defence story.

[38:00] Tom Sleep:
The Indo-Pacific strategy also has significant exposure to South Korea.

Tom, can you explain the Korean defence investment case?

Tom Bailey:
There are essentially two parts to the Korean story.

The first is higher domestic defence spending.

South Korea spends around 2.5% of GDP on defence and continues to face an obvious long-term security challenge on the Korean Peninsula.

Questions about the future extent of the US security umbrella provide another reason for Korea to retain a strong domestic military capability.

But arguably the more important investment story is exports.

South Korea is increasingly filling global gaps in defence production.

Poland is an important example.

It has purchased Korean K2 tanks, K9 howitzers and Chunmoo multiple-launch rocket systems.

One reason is cost.

Some Korean systems have been priced materially below comparable US alternatives.

Another advantage is speed of delivery.

At a time when Western defence manufacturers have large order books and long lead times, Korea can potentially supply equipment more quickly.

This has made the country’s defence industry particularly relevant to governments trying to rebuild military capacity rapidly.

Korean defence companies have also expanded their presence in the Middle East.

Air- and missile-defence systems have been sold into markets including the UAE, with further demand emerging elsewhere in the region.

So South Korean defence companies are increasingly exposed not simply to domestic rearmament but to the global defence spending cycle.

Estimates presented during the webinar suggested potential export revenues could be several times larger than domestic sales.

That makes Korea an important component of the wider Indo-Pacific defence investment case.

[42:50] Tom Sleep:
Before we wrap up, could each of you briefly summarise the investment case for your respective region?

United States

Jane Edmondson:
The US is already the world’s largest defence spender, and we expect continued investment across both replenishment and modernisation.

The next phase of spending isn’t simply about traditional platforms.

AI, autonomy, drones, missile defence, space, cyber and other next-generation capabilities are becoming increasingly important.

At the same time, Europe’s desire for greater defence autonomy doesn’t necessarily mean the US disappears from the picture.

There remains a technology gap in some areas, meaning we could continue to see cooperation, joint procurement and technology transfer between US and European companies.

Europe

Tom Bailey:
For Europe, the fundamental case that governments need to spend more on defence and more of that money domestically hasn’t gone away.

Valuations have also moderated from their previous peaks while earnings and order backlogs remain strong.

That combination may be more important to the investment case than the more speculative momentum we saw during parts of 2025.

India and the Indo-Pacific

Siddharth Batra:
For India, the key story is the structural shift towards self-reliance.

The government is serious about reducing defence imports, increasing domestic procurement and building a larger local manufacturing ecosystem.

At the same time, the export opportunity is expanding.

Combined with higher defence spending across the broader Indo-Pacific, those trends continue to support the long-term investment case.

Tom Sleep:
Thank you, Jane, Sid and Tom.

We’ve covered three very different but interconnected defence markets today: the scale and technological modernisation of US defence spending, India’s move towards indigenisation and exports, and Europe’s continuing rearmament.

Thank you to everybody who joined us and submitted questions.

If you have any further questions on the strategies discussed today, please contact the HANetf team.

Thanks again, and have a great afternoon.