Has the Ukraine war sparked investor interest in the defence sector?

New study suggests that the previously out-of-favour sector is gaining investment again as governments shore up defences

Has the Ukraine war sparked investor interest in the defence sector?
Steve Randall

While it might not sit comfortably with investors who have, or are building, an ethical portfolio, defence stocks are gaining interest according to a new study.

With the war in Ukraine prompting governments to provide defences for the country worth billions of dollars, Russia’s invasion has meant countries increasing budgets for defence.

With greater investment in the defence sector from governments, stocks in this sector are benefitting and research from Australia’s Deakin Business School shows a shift in attitude among investors.

Associate Professor Harminder Singh, a finance researcher, found a growing international appetite for defence sector stocks, reversing a trend to reduce these investments.

“There was a time when the investment community tried to avoid stocks in defence companies due to ESG concerns,” the professor explained.
“But the Russia-Ukraine war has meant many countries are moving to invest in their sovereign defence capabilities. Countries want to be able to defend themselves in case there are wider ramifications from the conflict.”

Reframing defence

Singh highlights how the war in Ukraine means a changing perception for the sector.

“While the prime motivation for the changing investor appetite we detected is profit, we are also seeing a corresponding shift in ESG considerations that allow this switch to become publicly palatable,” he said. “Investing in defence stocks can now be reframed in the more acceptable context of national security and community safety.”

Along with defence, the energy sector is also seeing a new wave of investors who may have previously avoided it due to ESG concerns.

Professor Singh points out that the gap in the market left by sanctions on Russia is accelerating investment in countries’ own alternative energy projects.

He expects the current interest in defence and energy to endure in the medium term.

“This investment trend towards the defence and energy sectors might stay for at least a couple of years, depending, as time tells, whether it is the financially fruitful move that investors hope,” he concluded.