Retail investor interest in AI stocks has waned as geopolitical tensions drive enthusiasm towards the defence sector. According to new research from online investing and trading platform IG, over 50% of retail investors believe the defence sector will experience the strongest growth over the next six months.
AI-related industries have slipped into second place, with 45% of investors expecting it to lead in growth, while 29% anticipate semiconductor equipment will deliver the largest growth, according to a survey of 1,800 investors. Chris Beauchamp, chief market analyst at IG, stated, “The drivers behind the defence sector are stronger than ever – and investors are clearly responding to momentum.”
Six months ago, retail investors predicted AI would outperform all other sectors, with two in five forecasting the highest growth for AI, compared to 37% opting for defence. However, increased uncertainty has seen AI fall out of favour. The introduction of Trump’s tariffs in April highlighted AI’s “fragile resilience on international supply chains,” as many are based in Asia, including Taiwan, which faced the harshest tariffs.
Intensifying competition from China has also increased pressure on the AI sector, as significant government investment spurs rapid advancements in AI hardware and software development, increasing the likelihood of UK reliance on Chinese-made AI components.
Heightened geopolitical instability and pressure from the Trump administration have fuelled a surge in NATO members pledging to increase defence spending, attracting investor interest. NATO has called for members to pledge 3.5% of their GDP for core defence and an additional 1.5% for related security investments at the June summit, with the UK among those agreeing to meet the combined 5% commitment.
This pledge has led to a spike in capital inflows into the global defence industry, with stocks rising sharply in value. London-listed company BAE Systems, for instance, saw shares increase by more than 50% in its most recent trading statement. Babcock also experienced a surge in operating profits, up over 50% to £364m in its latest results. Sentiment towards the FTSE 100 has grown to its strongest level, with 73% of IG clients expecting positive returns in the last six months of the year, up from 69% in December.
“Defence appears to offer more certainty,” Beauchamp commented. “Government spending commitments are increasing, and the broader geopolitical backdrop shows no sign of easing. For many investors, defence now looks like a more resilient growth story.”
