Why the Death of the “Peace Dividend” is a Multi-Decade Tailwind for Defense Industrials

In early 2026, the era of geopolitical “unpredictability” has graduated from a tactical concern to a permanent structural reality. For nearly three decades, global markets thrived on the “peace dividend”—a period of relative stability that allowed nations to suppress military spending in favor of social and economic growth. That era is officially over. We are now navigating a structural return to a defense-heavy global economy, where security is no longer a discretionary line item but a foundational prerequisite for market participation.

The question for investors is no longer if spending will rise, but how fast. With the June 2025 NATO agreement now in the rearview mirror and regional flashpoints intensifying, we are moving toward a world where 5% of GDP for defense is the new baseline. Are we returning to Cold War levels? The data suggests we are already there.

The Death of the “Peace Dividend” and the NATO Mandate

Historically, global defense spending averaged 4.5% of GDP prior to 1990. In the long slumber of the post-Cold War era, that figure plummeted to an average of 2.4%. However, the tide turned in 2021, and the current administration in Washington has fundamentally reset the expectations for its allies. By applying sustained pressure on Asian partners to “pay more for their own security,” the Trump Administration has effectively normalized the demand for defense expenditures to reach 5% of GDP.

This pressure culminated in the landmark June 2025 NATO agreement. Member countries have now committed to a 5% GDP investment target by 2035. Crucially, the composition of this 5% includes a 3.5% direct allocation to defense and a 1.5% carve-out for critical infrastructure and network defense. As we observe “uncertain and fractious geopolitics,” it is clear that higher defense spending is not a cyclical spike—it is a secular, structural theme that provides a long-term tailwind for the industrial base.

Singapore’s Fiscal Realism: Stepping Beyond the 3% Ceiling

Singapore serves as the regional bellwether for this fiscal pivot. While the nation has historically maintained a disciplined average of 2.8% of GDP for defense, current budgetary trends reveal a more aggressive stance. In FY25, defense spending was hiked 12.4% to SGD 23.4bn, hitting an eight-year high of 3.0% of GDP and accounting for an 18.9% share of total government expenditure.

As we look at the current FY26 budget, the allocation has risen to SGD 24.9bn. While this represents 2.9% of GDP and 18.1% of total expenditure, the real takeaway is the forward-looking guidance. Prime Minister Lawrence Wong has explicitly stated that the government is prepared to spend beyond the traditional 3% ceiling if necessary. This shift is necessitated by regional instability, including localized conflicts between Thailand and Cambodia, which have forced a rethink of ASEAN security requirements.

The Mismatch: Why Drones are Disrupting Defense Economics

Modern warfare is currently defined by a profound economic mismatch: the cost of traditional, high-end defensive hardware versus the negligible cost of unmanned systems (drones). This asymmetric reality is driving a massive investment shift. Governments are no longer just prioritizing heavy hardware; they are aggressively funding the ability to “deploy, counter, and operate alongside” unmanned systems.

For the strategist, the investment implication is a move away from rigid steel toward software-defined radios (SDRs) and advanced RF sensing. This transition allows for reconfigurable, “smart” defense solutions that can neutralize low-cost threats with digital agility. The value in the defense supply chain is migrating toward the software and sensor layers that provide the intelligence to win this asymmetric game.

First Case Study: The Addvalue Technologies Turnaround

Addvalue Technologies represents one of the most compelling “turnaround” stories in the small-cap defense and space segment. After almost going under a few years ago, the company reached a critical inflection point in FY25. Today, it is a high-margin play on what I consider the “sexiest” themes outside of AI: space and drones.

As of early 2026, Addvalue has expanded its customer base from a mere 4–5 clients several years ago to over 20. Backed by a record USD 26m backlog, the company is seeing a surge in demand driven by record satellite launches and anti-drone requirements.

• IDRS (Inter-satellite Data Relay Service): Captures the surge in real-time satellite communication needs.
• ADRs (Advanced Digital Radio): Leverages SDR expertise for the high-growth anti-drone market.

With a projected 86% PATMI CAGR (2025–2028E) and a 42% revenue CAGR, Addvalue is a rare profitable, high-growth Asian play in a sector traditionally dominated by western incumbents.

Second Case Study – ST Engineering: From Local Provider to Global Heavyweight

The sheer scale of the current defense cycle is most evident in ST Engineering (STE). In FY25, new contract wins surged by 49% to SGD 18.7b, propelling the total order book to a record SGD 33.2b. Most impressive, however, is the doubling of international defense sales in Europe and the Middle East in a single year.

From a valuation perspective, we are witnessing a fundamental rerating of the stock. We have raised our terminal growth rate for STE from 2% to 3%, acknowledging that the “new normal” of global spending creates a higher floor for long-term growth. STE is no longer just a domestic contractor; it is a global defense heavyweight with significant operating leverage. With a projected 15.2% PATMI CAGR through 2028 and healthy growth in its commercial aerospace and MRO segments, the stock’s current trajectory justifies multiples that exceed its historical peaks.

Conclusion: The “Guns and Butter” Dilemma

We are entering a sustained Industrial Defense Cycle that will redefine global capital flows for the next decade. Security has transitioned from a fixed cost of doing business to a primary driver of national industrial policy. As nations prioritize their borders and digital networks, the investment landscape is being rewritten in real-time.

As we look toward 2035, a final question remains for the global economy: In a world where security is no longer a fixed cost but a growing necessity, how will the trade-offs between “guns and butter” redefine the balance of global power and economic prosperity over the next decade?

Related stories: Addvalue Technologies Jumps 3,700% In 1H 2025/26