Jean Boivin – Head of BlackRock Investment Institute together with Wei Li – Global Chief Investment Strategist, Catherine Kress – Head of Geopolitical Research & Strategy, all forming part of the BlackRock Investment Institute and Simon Wan – Portfolio Manager from BlackRock Multi-Asset Strategies and Solutions share their insights on global economy, markets and geopolitics. Their views are theirs alone and are not intended to be construed as investment advice.
Key Points
Defense spending rising – The geopolitical fragmentation mega force is evolving, with a big focus now on rising defense spending. We refine our preferences across regions and sectors.
Market backdrop – Oil prices steadied after their surge on the Israel-Iran conflict. U.S. bond yields were little changed after the Fed signaled it was eyeing the impact of tariffs.
Week ahead – We watch the U.S. PCE data for signs of tariff impacts, so far limited in major data. Solid wage growth is keeping core inflation above the Fed’s 2% target.
Geopolitical fragmentation has deepened in the past decade through shocks like the pandemic, Russia’s invasion of Ukraine, fresh conflict in the Middle East and rising trade tensions. A shifting U.S. security posture has accelerated this trend, pushing up defense spending in the EU and Asia – with this week’s NATO Summit set to lift Europe’s further. As the geopolitical mega force evolves, we take an active approach to the theme and get granular across regions and defense exposures.
Geopolitical fragmentation and economic competition – a mega force, or big structural shift we’ve long tracked – is rapidly evolving across multiple fronts. First: the emergence of geopolitical blocs, evidenced by different views on the Ukraine war and alignments with the U.S. and China. Second: competition between those blocs, most evident in the U.S.-China AI race. Third: the rewiring of supply chains to build resilience and support national security. Together, these dynamics are deepening geopolitical fragmentation and sparking investment in defense globally. After undershooting for decades, defense spending in Europe has now hit its target of 2% of GDP and is set to rise further. See the chart. Many NATO members are expected to agree to up spending to 5% of GDP after this week’s NATO Summit in The Hague, with an expected 3.5% for defense and 1.5% for defense infrastructure.
Another mega force overlaps with these dynamics: artificial intelligence. Tech supremacy has become a national security priority — particularly for the U.S. and China, where AI leadership is seen as critical to both economic advantage and military superiority. AI is expected to revolutionize how militaries around the world organize and operate. Take the use of drones in Ukraine and the Middle East, for example. We think investors can benefit from exposure to defense, meaning companies and industries directly or indirectly involved in products, services or capabilities supporting a country’s defense infrastructure. Such exposures can be a source of portfolio resilience, in our view, especially in periods of heightened geopolitical volatility.
Getting granular within defense
Yet we’re selective about which geographies and sectors we prefer to express the defense theme. Across regions, we eye opportunities in Europe as defense and infrastructure investment ramps up. Yet we stay selective for now given the over 60% surge in its aerospace and defense sector this year, according to LSEG data. Defense stocks in Japan and Korea look more attractive, in our view. We also favor the U.S.: it spends more than double on defense than Europe, SIPRI data shows. And it is home to the most advanced defense and defense tech firms. Many countries source key systems — especially air and missile defense — from U.S. suppliers. Among sectors, we see opportunities in defense tech. That includes not just AI and software companies, but also IT services and hardware like semiconductors that enable advanced technologies. We think many private companies in defense tech could launch initial public offerings (IPO) in coming years, allowing investors to tap this theme through public markets. We also like space tech, which we think could benefit as strategic competition intensifies.
In private markets, we see both near- and long-term opportunity, especially in infrastructure. Private markets are well suited for the capital-intensive, long-term nature of defense and infrastructure projects. Private markets can also fill in the gaps created by constraints on public funding that make it more difficult to get large infrastructure projects over the line without external funding. That is especially the case as worries about government debt and fiscal deficits mount.
Our bottom line
Growing geopolitical fragmentation and strategic competition in AI are reinforcing the global focus on national security and resilience – creating opportunities in defense. But as both mega forces evolve, they call for a selective approach.
Market backdrop
Oil prices added to gains to be up about 10% to near $75 a barrel since June 12 on concerns about potential energy supply disruptions as the conflict between Israel and Iran persisted. Stocks moved sideways, with the S&P 500 ticking down. U.S. 10-year Treasury yields were also mostly steady near 4.40%. The Federal Reserve kept policy rates unchanged, as expected. We still see a tight labor market and the eventual impact of tariffs limiting the Fed’s scope to cut rates.
We watch U.S. PCE data for signs of tariffs feeding through to consumer prices. Inflation data has been noisy since the pandemic, with big month-to-month swings making it difficult to draw conclusions. Wage growth has remained elevated, likely preventing inflation from settling at the Federal Reserve’s 2% target. We also watch early surveys for June activity to gauge how tariffs are impacting global manufacturing sentiment.
Week Ahead
June 23 : Global flash PMI
June 26 : U.S. durable goods
June 27 : U.S. PCE; Japan unemployment
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