Aerospace & Defence: From Cyclical Exposure to Structural Growth

What the start of this decade has made increasingly clear is that today’s global security environment has become more uncertain, and we are living in a more dangerous world than before. Conflicts in Ukraine and Iran, along with broader geopolitical instability, are reinforcing the need for sustained investment in national defence. We believe this represents a shift from episodic spending cycles toward a more durable, multi-year rearmament phase. The question is no longer whether defence spending is increasing, but whether its duration and composition have fundamentally changed.

Historically, defence spending has followed a cyclical pattern, often tied to discrete programs or periods of heightened conflict. Today, however, structural factors are increasingly supporting demand. Governments are not only investing in new capabilities but also rebuilding depleted inventories and maintaining a higher baseline level of readiness. This shift toward replenishment is creating more consistent demand across aerospace and defence, as reflected in the higher baseline of global defence spending in recent years. Notably, this trend extends beyond major powers, with even smaller countries such as New Zealand planning billions of dollars in defence upgrades over the coming years.

Growing defence programs and emerging technologies upend the traditional market

Emerging technologies are reshaping how modern warfare is conducted. Capabilities such as missile defence, advanced sensing, secure communications and counter-drone systems are becoming central to national security strategies. Large-scale, layered defence initiatives are likely to be particularly durable sources of funding. National programs tied to missile defence systems such as “Golden Dome” reflect a growing emphasis on protecting critical infrastructure and populations from increasingly sophisticated threats, with planned spending of $175 billion over three years and potential costs far exceeding this.

These dynamics are supporting sustained investment across multiple areas of the defence supply chain. While large prime contractors remain central to system integration, value is increasingly accruing to companies that provide mission-critical components within these systems. Exposure to areas such as propulsion, sensing and communications can benefit from both rising demand and limited supply, particularly where production capacity is constrained or capabilities are difficult to replicate.

BAE Systems, L3Harriss and RTX illustrate this dynamic. Their exposure to growing areas such as propulsion, tracking and sensing technologies is expanding addressable demand. And capacity constraints in areas such as solid rocket motors can create both volume growth and margin expansion as production capacity is increased. Across the industry, this is reflected in strong order books, growing backlogs and sustained increases in defence budgets.

Beyond defence: Aerospace and the drive for efficiency

After a prolonged downturn, commercial aerospace is in the early stages of its own production recovery, supported by strong travel demand and aging fleets. The introduction of aircraft and engine platforms creates a multi-year opportunity tied not only to original equipment production but also to maintenance, repair and overhaul activity.

At the same time, airlines are increasingly focused on fuel efficiency, driving demand for next-generation engines and components. Higher fuel costs further reinforce this dynamic, increasing the economic incentive to replace older, less efficient engines. The longer oil remains more expensive than it was at the beginning of the year, the greater the incentive for airlines to update their fleets to ever more efficient engines.

This combination of new production and aftermarket demand creates a longer runway for growth across aerospace suppliers, particularly those exposed to engine components and services. In many cases, these businesses benefit from recurring revenue streams tied to installed base, supporting more durable earnings profiles over time. At the same time, the transition to newer aircraft and engine platforms may create some dispersion within the supply chain, benefiting manufacturers of next-generation components while creating headwinds for suppliers tied to older platforms. Across our portfolios, we are invested in companies such as Melrose, Woodward, FTAI and RBC, which we believe are positioned to benefit from a multi-year cycle of aircraft modernization and engine efficiency improvements.

Implications for asset management

Taken together, these trends suggest a meaningful shift in how aerospace and defence should be viewed from an investment perspective. Historically, these areas—both of which are typically classified as industrials—have typically not been core holdings in growth portfolios, given their cyclical and capital-intensive characteristics. However, as demand becomes increasingly supported by structural drivers, their inclusion within growth portfolios may begin to change. As indicative of this shift, the Russell 3000® Growth Index industrials weight recently crossed 7.5%, a more than 47% increase since January 2025. We believe this marks the early stages of a trend that will last a decade or more.

In our view, the key question is not simply whether aerospace and defence spending is increasing, but rather how its nature is evolving. Companies with exposure to mission-critical components, constrained supply chains and long-cycle aerospace platforms may be particularly well positioned as these industries transition toward more durable growth profiles over the coming decade.

We believe that the growth cycle opportunity in defence transcends the current conflicts in Ukraine and Iran, despite the acceleration in commitments by governments to support these conflicts. NATO’s European members will likely be obligated to meaningfully expand their defence spending over at least the next decade in order to catch up, and as a result, a number of defence-related companies will be well positioned for a long cycle.

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