摩根士丹利-新兴世界见闻洞察 新国防经济 TALES FROM THE EMERGING WORLD INSIGHTS The New Defense Economy

TheNew

DefenseEconomy

TALESFROMTHEEMERGINGWORLD|EMERGINGMARKETSEQUITYTEAM|November2026

ForthreedecadesafterthefalloftheSovietUnion,Europe

treateddefensecapacitylikeaninsurancepolicyitcouldaffordtounderfund.Theirarsenalexistedonpaper,butthesupply

chainbehindithadatrophied.Ukraine,theMiddleEastand

risingtensionsinAsiahaveshownthatdeterrencedependsonreplacementcapacityasmuchasontanks,aircraftormissilesystems.Whatgetsdeployedinamatterofmonthsofhigh-intensityconflicttakesyearstoreplace.Thatshiftiscreatinganewdefenseeconomy,andenablingselectemergingmarkets(EM)tohelprebuildtheWest’sarmament.

DecadesofleanprocurementlefttheWestwithdefenseindustriesdesignedforpeacetime,unpreparedforsustainedconflict.Modernwarconsumes

shells,interceptors,dronesandsparepartsfasterthanthoseindustries

werebuilttosupply.Industrialcapacitynowconstrainsdefenseasmuchasbudgetsdo.

Afteryearsofanemicgrowth,globalmilitaryspendinghitarecord$2.9

trillionin2025.Lastyear,NATO’sEuropeanmembersandCanadaraised

spending20%inasingleyear,itshighestgrowthsince1953.Polandalonenowspends4.5%ofGDPondefense,thelargestinthealliance.Polisharmsimportswereninetimeshigherin2021-2025thanin2016-2020andEuropenowsitsatthecenterofthedefenserebuildbecausethethreatisclosebyandtheunderinvestmentdeepest.

Webelievethatcreatesaninvestmentthemebeyondthetraditional

U.S.defensecomplex.WhileEuropeisdrivingthedemand,someofthemostinterestingsupply-sidebeneficiariessitinEM,whereexportersoffercapability,speedandlowercosts.

AUTHORS

DIDIERROSENFELDExecutiveDirector,Emerging

MarketEquities

ROSEKIM

ExecutiveDirector,Emerging

MarketEquities

SAUMYAJAIN

VicePresident,Emerging

MarketEquities

Europe’sDemandShock

Formuchofthepost-ColdWarperiod,WesternEurope

spentbelowtoday’sNATObenchmark,leavingthin

ammunitionstocks,agingplatformsandanindustrialbasecalibratedforpeacetimeprocurement.Thereturnofahigh-intensitywartoEuropechangedthecontinent’sstrategicthinking,whereuncertaintyoverthedurabilityofU.S.

supporthasacceleratedthisshift.

Europe'smilitaryspendingrose14%in2025.Francealonehasmorethan180combataircraftonorder,almostall

ofthemDassaultRafalefighterjets.Atthe2025Hague

summit,NATOmemberscommittedtospending5%ofGDPondefenseandrelatedsecurityrequirementsby2035.

Budgetstaketimetoturnintomissilefactories,propellantlines,trainedweldersandshellstockpiles.NATO's

procurementagencyhasindicatedammunitiondeliveriestoUkrainecantake24to36months,whiletheUK'splanto

sharplyincrease155mmshellproductionhasbeendelayedbyatleastsixmonths,withfulloperationexpectedin2027.Europe’scatch-upcycleislikelytobelonganduneven,heldbackbybottlenecksacrosstheindustrialbase(Display1).

Thethreatsethasalsowidened.Cyberattacks,navigationjamming,disinformationcampaignsandattacksoncriticalinfrastructureaddrisksthatconventionalfirepowerdoesnotaddress.Europeneedsabroaderindustrialbase,fasterprocurementandsuppliersthatcandeliverquickly.

DroneWarfare

Droneshaveloweredthecostofcombat,evenasthecoreforcestructureremainsconventional.Cheap,expendable

systemscannowprovidesurveillance,precisionstrikes,

electronicwarfareandlong-rangeattacks.Dronesare

relativelyeasytomassproduceandhavebecomeubiquitousinrecentconflictsinArmenia,UkraineandtheMiddleEast.Ukraineisnowaleaderinfirst-person-view(FPV)drones,

rapidlyincreasingtheirmonthlyunitproductioncapacityfrom20,000in2024to200,000in2025,havingplannedtotripleitto600,000in2026.

TheU.S.NationalDefenseAuthorizationActhasearmarkedabout$1.7billionforsmallunmannedaerialsystems,morethanquadruplewhatitspentin2022,butstillwellunderonepercentoftheoveralldefensebudget.U.S.Foreign

MilitarySalesapprovalstotheMiddleEasttopped$45

billioninQ12026alone,morethantheglobaldronemarketgeneratesinafullyear.

DISPLAY1

EuropeHasBecometheDemandShock

Share(%)ofglobalarmsimports*

50%

40%

30%

20%

10%

0%

33%

12%

MiddleEastAmericasAfrica

42%

31%

33%

26%

2016-20202021-2025

Asia/Oceania

5.5%5.6%

4.3%

7.5%

Europe

Source:StockholmInternationalPeaceResearchInstitute(SIPRI)Military

ExpenditureDatabase.Asof3/31/2026.*Globalarmsimportsarebasedonvolumeoftransfersofmajorarms.TheSIPRIusesauniquepricingsystem,

thetrend-indicatorvalue(TIV),tomeasurethevolumeofdeliveriesofmajorconventionalweapons.TheSIPRITIVmeasurestransfersofmilitarycapabilityratherthanthefinancialvalueofarmstransfers.

Conventionalplatformsremainthebackboneofmilitary

forces,andthatiswherethebulkofnewspendingcontinuestobedirected.Thefuturebattlefieldislikelytopairdroneswithconventionalforcesthatwillstillrequiredepth

andreplenishment.

SouthKorea:SpeedandScale

SouthKoreaisoneofthemorecredibleEMbeneficiariesoftheglobaldefensecycle.Itsadvantageisstructural:

decadesofprocurementlinkedtotheNorthKorean

threathavesupportedcontinuousinvestmentinweaponssystems,large-scaledomesticproductionandspecializedsupplychains.AsamajorU.S.treatyally,SouthKoreahasdevelopeditsdefenseindustrywithinaWestern-alignedsecurityframework,whileretaininggreatermanufacturingcontinuityandscalethanmanyofitsWesternpeers.

ThismattersmoreasWesternbuyersprioritizenear-term,battlefield-testeddeliverycoupledwithsustainableafter-salessupportfordefensesystems.SouthKoreansuppliersofferabroadportfolioacrosstanks,self-propelledartillery,missiles,ammunitionandarmoredvehicleswithshorter

deliveryschedulesand,inmanycases,pricingbelow

comparableWesternsystems.Largedomesticordersalsoimprovefixed-costabsorptionandsupportproductionat

scale.Thatcontinuityhasdevelopedtechnicalexpertise,

establishedsupplychainsandeconomiesofscalethatmanyWesternproducersarenowtryingtorecreate.

2MORGANSTANLEYINVESTMENTMANAGEMENT|TALESFROMTHEEMERGINGWORLD

Polandhasemergedasananchorcustomer,accountingforapproximately46%ofSouthKoreandefenseexportsin

2025.Totalexportsincreasedfromroughly$7.3billionin

2021to$15.4billionin2025,reflectingSouthKorea’sabilitytoconvertmanufacturingcapacityintolarge,multi-platformexportcontracts(Display2).Thenextphasedependson

continuedorderinflowsandthespeedofrearmamentamongNATO,Indo-pacificandMiddleEastpartners.

Brazil:SpecializedPlatforms

BrazilisaslimmerchapteroftheEMdefensestory.ItlacksSouthKorea’sbreadthandproductionscalebuthasbuiltexpertiseinmilitarytransportaircraft,rocketartilleryandarmoredvehicles.Brazil’saerospaceanddefensesectorshaveproducedmilitarytransportaircraftnowflyingwithseveralNATOmembers,evidencethatEMplatformscanpassdevelopedmarket’sprocurementstandards.The

flagshipoftheaerospacesectoristheC-390Millenniummilitaryaircraft.

Rocketartilleryandlocallybuiltarmoredpersonnelcarriersroundoutanexportcatalogueaimedatbudget-conscious

militariesinLatinAmerica,AfricaandtheMiddleEast.Theopportunityisstillmaturing.Asexportvolumesbuildand

governmentsupportsolidifies,Brazilcouldbecomemore

visibleinEMdefense,thoughitsroleislikelytoremainmorespecializedthanSouthKorea’s.

India:LocalizationRunway

IndiaisnotyetanexportpowerlikeSouthKoreaandits

spendingcycleislessrapidthanEurope’s.ThecountrystillreliesonRussia,France,Israelandothersuppliersformanyadvancedsystems.Forexample,Indiaapprovedthepurchaseof114RafalesinFebruary.

Indiahasalargedomesticmarketandaclearpolicy

preferenceforlocalization.Thechallengeisexecution:

procurementremainsbureaucratic,technologygapspersistandtheindustrialecosystemisstilldeveloping.India’s

opportunitiesarelikelytobeselectiveratherthanbroad.Themoreinvestableareasareexpectedtobeelectronics,radars,sensors,missilesandammunition,wheredomesticsupplierscanparticipateinimportsubstitution.

WhyEmergingMarketsMatters

TheU.S.remainstheworld’sdominantdefensesupplier,

thelargestdefensespenderandtheleadingexporter

ofadvancedweaponssystems.CountriesstillwantU.S.

equipment,buttheyalsowantlocalsupport,fasterdeliveryandconfidencethatcontractswillbefulfilled.

ForEMdefensecompanies,theopportunityliesinthecategorieswherebuyersneedspeed,affordabilityandsupplyassurance.AstheWestretoolsdeterrenceafterdecadesofunderinvestment,Europe’sdemandshockisalreadytranslatingintotangiblemarketsharegainsforselectedEMdefensesuppliers.

DISPLAY2

SouthKorea’sShareofGlobalArmsExportsIsRising

%ofglobalarmsexports

2016201720182019202020212022202320242025

14%

12%

10%

8%

6%

4%

2%

0%

9.9%

2.3%

SouthKoreaAPACex-S.Korea

9.3%

1.4%

4.1%

6.0%

5.5%

3.9%

6.5%

2.5%

6.4%

2.0%

5.8%

3.6%

7.3%

0.7%

5.1%

3.4%

6.1%

2.2%

Source:SIPRIMilitaryExpenditureDatabase.Asof3/31/2026.

TALESFROMTHEEMERGINGWORLD|MORGANSTANLEYINVESTMENTMANAGEMENT3

4MORGANSTANLEYINVESTMENTMANAGEMENT|TALESFROMTHEEMERGINGWORLD

RiskConsiderations

Thereisnoassurancethataportfoliowillachieveitsinvestmentobjective.Marketvaluescanchangedailyduetoeconomicandotherevents(e.g.naturaldisasters,healthcrises,terrorism,conflictsandsocialunrest)thataffectmarkets,countries,companiesorgovernments.Itis

difficulttopredictthetiming,duration,andpotentialadverseeffects(e.g.portfolioliquidity)ofevents.Ingeneral,equitiessecurities’valuesalsofluctuateinresponsetoactivitiesspecifictoacompany.Investmentsinforeignmarketsentailspecialriskssuchascurrency,political,

economic,marketandliquidityrisks.Therisksofinvestinginemergingmarketcountriesaregreaterthantherisksgenerallyassociatedwithinvestmentsinforeigndevelopedcountries.Investingincompaniesinanticipationofacatalystevent,suchasArtificialIntelligence(AI)

adoption,carriestheriskthatsuchcatalystsmaynothappen,orthemarketmayreactdifferentlythanexpected.CompaniesfocusedonAI

mayhavelimitedproductlines,markets,orfinancialresources,andthemanagementofsuchcompaniesmaybemoredependentuponone

orafewpeople.APortfoliomaybeparticularlyimpactedbyeventsthatadverselyaffectAIadoption,suchasrapidchangesintechnology

productcycles,productobsolescence,governmentregulation,andcompetition,andmayfluctuatemorethanthatofaportfoliothatdoesnotinvestsignificantlyincompaniesadoptingAI.

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