The Risks of Politicizing the Military and Its Impact on Defense Sector Investing: Assessing Long-Term Geopolitical Instability and Defense Spending Misallocation

The defense sector, long a cornerstone of geopolitical strategy, has become increasingly entangled with political agendas, creating a volatile landscape for investors. From 2020 to 2025, global defense spending has surged to $2.46 trillion, driven by escalating conflicts, rising populism, and the militarization of trade rivalries [3]. However, this spending boom is not without consequences. Political interference in military affairs has exacerbated geopolitical instability, diverted resources from critical security priorities, and introduced systemic risks to defense procurement and stock valuations.

Geopolitical Instability and the "Flight-to-Arms"

The 2014 annexation of Crimea and the 2022 Russia-Ukraine war exemplify how geopolitical crises trigger a "flight-to-arms" phenomenon. Defense companies saw immediate stock volatility, with 50.6% of global firms affected by Crimea’s annexation and 81.4% impacted by the Ukraine war [2]. This sensitivity is not merely reactive: geopolitical risk indices (GPR) have shown a persistent co-movement with defense stock volatility, particularly in the U.S. and Europe [1]. For investors, this means defense stocks are increasingly tied to unpredictable political events, such as Houthi attacks on Red Sea trade routes or U.S.-China trade wars, which disrupt supply chains and erode long-term profitability [4].

Defense Spending Misallocation: Corruption, Lobbying, and Fiscal Trade-Offs

While defense budgets have expanded, their allocation has been plagued by inefficiencies. Corruption scandals involving firms like Thales and Rolls Royce highlight governance risks, while defense lobbies spent $110 million in 2024 to influence U.S. policy, raising concerns about conflicts of interest [1]. The EU’s proposed 1.5% GDP increase in defense spending, for instance, risks a 2 percentage point rise in government debt-to-GDP ratios by 2028, illustrating the fiscal trade-offs between security and economic stability [5]. Meanwhile, fragmented European defense industries—reliant on U.S. imports—struggle to match the U.S. sector’s consolidated R&D and capital investments, further complicating strategic autonomy [5].

Military Morale and Procurement Uncertainty

Politicization of military leadership has also eroded institutional trust and procurement efficiency. Frequent leadership changes under polarized administrations, such as Trump’s "revolving door" policies, have led to procurement delays and inconsistent funding priorities [1]. A 2025 study found that 75% of mid-career military officers opposed domestic deployments, underscoring a professional resistance to partisan entanglement [1]. This tension between political directives and military ethics risks long-term morale issues, which could undermine readiness and operational effectiveness.

Stock Valuation Volatility: A Double-Edged Sword

For investors, the defense sector’s exposure to geopolitical risk presents both opportunities and hazards. While events like the Ukraine war have driven short-term gains for firms like Northrop Grumman (NOC), the long-term outlook is clouded by procurement uncertainty. For example, the U.S. Army’s push for performance-based contracting and multiyear agreements under Secretary Pete Hegseth aims to streamline spending but introduces risks if political priorities shift [3]. Similarly, supply chain vulnerabilities—optimized for cost efficiency but lacking scalability—could amplify losses during crises [2].

Conclusion: Navigating the Risks

The politicization of the military has created a feedback loop: rising geopolitical tensions justify higher defense budgets, which in turn fuel lobbying, corruption, and fiscal strain. For investors, the key lies in balancing exposure to short-term "flight-to-arms" opportunities with long-term risks tied to procurement inefficiencies and geopolitical volatility. As NATO’s 5% GDP spending target and U.S. defense budgets near $1 trillion, the sector’s resilience will depend on governance reforms and strategic clarity—factors that remain as uncertain as the conflicts driving demand.

Source:
[1] Global Defence Industry at a Critical Juncture, [https://ti-defence.org/global-defence-industry-at-a-critical-juncture-strengthening-governance-and-managing-risks-amidst-soaring-military-spending/]
[2] Investigating the effect of geopolitical risk on defense, [https://www.sciencedirect.com/science/article/pii/S2405844024170053]
[3] Hegseth Tasks Army to Transform to Leaner, More Lethal Force, [https://www.defense.gov/News/News-Stories/Article/Article/4172313/hegseth-tasks-army-to-transform-to-leaner-more-lethal-force/]
[4] Do geopolitical risks affect stock market returns and volatilities: an analysis based on the TVP-VAR model, [https://www.researchgate.net/publication/386410936_Do_geopolitical_risks_affect_stock_market_returns_and_volatilities_an_analysis_based_on_the_TVP-VAR_model]
[5] The economic impact of higher defence spending, [https://economy-finance.ec.europa.eu/economic-forecast-and-surveys/economic-forecasts/spring-2025-economic-forecast-moderate-growth-amid-global-economic-uncertainty/economic-impact-higher-defence-spending_en]