Capital Ideas^™ 
Investment insights from Capital Group

Against a backdrop of war in Ukraine and the Middle East, as well as a global trade war, nations are redefining their relationships with allies, rivals and trading partners to bolster their national security.

And security encompasses more than just defence spending. As the geopolitical landscape has grown increasingly uncertain and fragmented, nations are taking on greater responsibility — and investing aggressively — to secure resources vital to their interests. This extends to safeguarding access to reliable energy resources as well as updating national infrastructure and securing dependable supply chains for essential goods and raw materials.

We expect this security imperative will translate into significant capital expenditure by governments around the world. This is a global trend that represents growth tailwinds for companies across a range of industries, including aerospace and defence, construction, capital goods, energy and utilities, as well as leading-edge technology.

Companies that can innovate and meet rapidly evolving security needs will likely benefit the most. We are taking advantage of our global research footprint to anticipate where these forces will lead and what companies stand to gain.

Here are three ways we believe a global focus on security will boost growth for well-positioned companies and drive investment opportunities in the coming years.

1.  National security: A wave of defence spending

Armed conflict inevitably has tragic consequences, starting with the human cost of lives lost and populations displaced, as well as economic repercussions on all sides. The wars in Ukraine and Gaza, and more recently the hostilities in Iran, have underscored these realities. But they have also reinforced the importance of robust defensive resources. Leaders in Europe, Japan and other countries are recognizing the need to invest in their own defence.

NATO allies pledged in June to ramp up their defence spending from a targeted 2% of gross domestic product (GDP) to 5% by 2035, a monumental change that reflects an ongoing transformation of the geopolitical landscape. This spending agreement, advanced by the U.S. administration, signifies a major turning point for the 80-year-old alliance.

Even before the NATO agreement, defence spending was on an upward trajectory. European and Canadian defence budgets rose 18% in 2024. In the first quarter of 2025, Germany disclosed plans for aggressive fiscal stimulus focused primarily on defence and infrastructure. Outside of NATO, Japan’s cabinet approved a 9.4% increase in its defence budget in December 2024.

Defence stocks have already surged. As of July 16, the S&P Europe Defense Vision Index and S&P Aerospace & Defense Select Industry Index have climbed 75.6% and 29.7%, respectively, for the year. Valuations have become stretched with the substantial run-up in stock prices.

We believe rising defence budgets represent a long-term tailwind, but only for those innovators that can adapt to a rapidly evolving landscape.

Take U.S. contractor RTX, a maker of cutting-edge radar and missile defence systems. Demand for its offerings has soared as nations in Europe and the Middle East have undertaken defence modernization efforts. The wider adoption of drones could provide additional tailwinds for both U.K.-based BAE Systems and U.S.-based Northrop Grumman.

Elsewhere, backlogs are growing for similar German firms. The backlog for Rheinmetall, a maker of advanced defence systems, reached a new high of €55 billion during its 2024 fiscal year, with the firm citing significant projects in the U.S., U.K., Italy and Ukraine. Hensoldt, a manufacturer of radar and precision optics used in aircraft, posted a record backlog this spring. These companies, among others, could benefit as European governments look for opportunities to allocate budgets toward domestic companies.

Ships have become another priority, and we’ve been sizing up opportunities in Asia. Although U.S. companies produce cutting-edge defence systems, America faces challenges of its own in modernizing its naval fleet and may need to look abroad for some solutions. For example, in recent trade negotiations with South Korea, shipbuilders Hyundai Heavy Industries and Hanwha Ocean have offered to move some operations to the states and help the U.S. revitalize its production capabilities. Other leading shipbuilding companies are domiciled in Asia, including Japanese conglomerates Mitsubishi Heavy Industries and Kawasaki Heavy Industries, both of which also make gas turbines and other power generation equipment.

2.  Energy security: The lifeblood of any economy

Secure access to energy is essential to a functioning economy and a matter of national security. Germany and other European nations learned this the hard way when they were cut off from access to cheap natural gas after Russia’s invasion of Ukraine. There are stark regional differences in energy resources, so the U.S., Europe and Asia face differing challenges.

The U.S. shale fracking industry is in a relatively enviable position, providing the country with an abundance of cheap natural gas and oil. The availability of affordable energy provides a range of U.S. manufacturers with a distinct competitive advantage since energy is one of the highest input costs for many companies. What’s more, the U.S. transitioned from a net importer to a net exporter of energy in October 2019. Today it ranks as the world’s largest crude oil producer at 12 million barrels of oil per day.

For the first time in years, power demand is rising rapidly in the U.S. thanks to the construction of AI data centers and the reshoring of manufacturing. To meet the demand, companies are increasingly exploring the use of nuclear energy — a trend that could bring attention to once staid utility companies.

For example, Meta Platforms is tapping into an Illinois nuclear plant owned by electric utility Constellation Energy to support its growing energy needs in the region. And in May, President Trump signed executive orders aimed at accelerating the construction of nuclear facilities in the U.S.

European nations including the U.K., Poland and France have taken steps to increase their nuclear capacity. Canada-based Cameco, a uranium producer with operations in Canada, the U.S. and Kazakhstan, has plans to expand its mining operations to meet skyrocketing global demand.

European nations are turning to U.S. producers of liquid natural gas (LNG). Cheniere Energy, an exporter of LNG to Europe and Japan, has long-term agreements to supply companies in Germany, Portugal and Austria.

3. Supply chain security: Sourcing closer to home

The COVID pandemic exposed the fragility of supply chains, as well as the importance of companies and governments building their resilience with a range of suppliers. Today, amid growing geopolitical and trade conflicts, the emphasis is on securing supply chains for essential goods, like semiconductors, critical minerals and metals.

Take copper, for example. Nations recognize the need to secure access to the metal, given its central role in data centers, grid modernization and other industrial needs. Demand is expected to generate shortages in key locations in Chile and elsewhere in South America.

In our view, leading copper producers may benefit from this higher demand as well as President Trump’s copper tariffs. Swiss mining company Glencore is leveraging operations in Argentina to double its copper output in the coming years. In the U.S., Freeport McMoran has disclosed plans to expand its copper mining and refining operations.

China also controls the world’s supply of rare earth minerals, which are essential for batteries as well as military equipment like drones. China has spent years securing rare earth rights in deals with countries across Africa and South America.

Western nations are taking action to try to bolster manufacturing in their markets and secure access to vital commodities and products. Most notably, the One Big Beautiful Bill Act provides incentives for companies bringing manufacturing to the U.S. Potential beneficiaries include builders of industrial machinery, heating and ventilation system providers, drugmakers, semiconductor companies and technology firms.

An expanded U.S. tax credit for building semiconductor plants on American soil could strengthen domestic production for companies such as Micron Technology and Taiwan Semiconductor Manufacturing Company, along with suppliers of semiconductor equipment. Provisions for health care companies could provide a boost to GLP-1 makers Eli Lilly and Novo Nordisk, who are seeking to increase their footprint in the U.S.

The bottom line: Long runways of growth potential

Government spending commitments and other tailwinds are combining to generate a second wave of growth potential for well-positioned industrials and defence firms. We believe this is a durable theme that should spur corporate spending and perhaps lead to a broadening in the stock market, which has been dominated by mega-cap tech stocks.

Companies that offer leading products across a range of government priorities stand to benefit the most. They include providers of goods in multiple categories, including power generation, grid modernization and defence systems.

Of course, higher government investment over the long term won’t benefit all industrial companies equally. Going forward, stock picking will be crucial. We are paying close attention to the duration of spending increases across markets and company valuations that could support further share price increases. As active global investors, our focus will be on identifying spending priorities that are most sustainable, and those companies best positioned to benefit from these trends.