Weapons vs devices – have defence shares burst the AI bubble?

Artificial intelligence (AI) has been an omnipresent drive within the UK for a while, with quite a few trade professionals, together with these in monetary providers, implementing the know-how in each their skilled and their private life.

Yet, regardless of the fixed hype surrounding AI that’s fed by headlines and firm CEOs, and even by prime minister Keir Starmer along with his appointment of an AI adviser, UK buyers should not as bullish in the direction of the tech as they as soon as have been.

This, partially, is a results of the exceptional rise in reputation of defence shares.

Shock surge

Towards the top of July, investing and buying and selling platform IG launched its biannual sentiment tracker, which revealed that UK retail buyers believed that defence would outperform all different sectors, together with AI, over the subsequent six months.

This was the primary time that defence had taken the highest spot within the tracker, with AI slipping into second place.

AI nonetheless presents alternatives for buyers, however it’s honest to say that lots of the massive gamers, like Nvidia, are actually pretty valued

The sudden surge was deemed a shock on the time, given the seemingly fixed consideration AI had acquired over the previous decade or so.

In the earlier IG tracker, AI had narrowly managed to retain the highest spot, however the ratio of 40% AI to 37% defence confirmed that the latter sector was shortly closing the hole.

It was solely in 2022 {that a} world survey on behalf of the World Economic Forum discovered that 60% of adults anticipated AI to profoundly change their every day life within the subsequent three to 5 years. So, what has precipitated defence shares to overhaul this vastly influential know-how?

Myriad of things

Guinness Global Investors European Equity Income portfolio supervisor Will James believes there are a lot of causes behind the shift in sentiment.

The Russian invasion of Ukraine is one issue, he says, having helped to drive extra consideration in the direction of investing in defence – notably in Europe. Additionally, it has highlighted the real risk posed by Russia and the necessity to bolster defence spending.

Defence shares boast income, visibility and resilience, which makes them stand out in comparison with different sectors

In February 2025, this was bolstered additional when US vice-president JD Vance stated Europe may not depend on the US for its personal safety and should do extra itself. James says this comment “helped to sharpen the focus for investors”.

Since Vance’s remark, the defence funding sector has rallied aggressively. This has left buyers with ‘fear of missing out’, feels James, “which one can see from the large flows into defence funds”.

Another sizeable issue is the Nato summit held in The Hague in June, which noticed members commit to boost defence spending to five% of GDP by 2035.

“Without doubt,” says James, this added to the extra constructive angle in the direction of defence shares, from a return-on-investment (ROI) perspective.

The political consensus round sovereignty and deterrence makes defence one of many few sectors the place long-cycle progress is actually coverage mandated

“This shows that defence is a medium/long-term story, rather than a short-term one,” as a result of restocking in nations reminiscent of Germany, may take upwards of a decade, says Morningstar chief fairness strategist Michael Field.

Defence is ‘resilient’

All of those elements, together, imply that defence shares – not like extra cyclical sectors the place demand might fade – are considered a extra dependable, long-term funding.

Morningstar fairness analyst Loredana Muharremi factors out that defence contracts are authorities backed and multi-year in nature, offering extra safety and fewer threat for buyers.

AI buyers have gotten extra sheepish, with the precise outcomes from AI funding restricted thus far

Defence shares, she provides, boast “revenue, visibility and resilience”, which makes them stand out in comparison with different sectors.

Risks surrounding defence nonetheless exist, after all; no inventory is infallible. However, Muharremi says the political consensus round sovereignty and deterrence makes defence one of many few sectors the place long-cycle progress is actually coverage mandated.

Faltering AI

Field observes that, whereas defence is on the rise, AI has began to falter on the similar time.

Despite buyers nonetheless putting each their religion and their cash in AI, they’re “becoming more sheepish, with the actual results from AI investment limited to date”, he says.

“AI still offers opportunities for investors,” acknowledges Field, “but it’s fair to say that many of the big players, like Nvidia, are now fairly valued.”

Defence is a medium/long-term story, somewhat than a short-term one

This is in comparison with defence companies reminiscent of BAE Systems within the UK and Rheinmetall in Germany, which nonetheless provide engaging upside. So far in 2025, BAE Systems’ shares have risen by 59%, whereas Rheinmetall’s have soared by 192%.

However, on the Guinness Global Investors convention in September, former UK chancellor Jeremy Hunt described each know-how and defence as “the best UK sectors in which to invest”.

He added that they might expertise a considerable amount of progress this century, with the UK holding a robust place in each.

Hunt additionally defined that “defence feeds into tech”, some extent he makes in his second printed ebook, entitled Can We Be Great Again?

Long-term asset

Regardless of the angle from which one approaches defence funding, the final opinion appears to be that it’s going to ship an ROI.

With world tensions exhibiting little to no signal of de-escalating, and government-backed defence spending rushing up, that is an asset designed for the long run.

The comment by JD Vance helped to sharpen the main target for buyers

AI has not left the funding panorama altogether, however it’s definitely beginning to take a again seat by way of reputation amongst buyers.

And that’s one thing each monetary adviser will hold a detailed eye on with regards to balancing portfolios.