Drones are re-defining warfare

 

Having a defence against drones is no longer an option, it’s a necessity.

Over the weekend, it was confirmed the UK is to provide military support to Belgium after a series of suspected Russian drone incursions into its airspace last week.

EU foreign policy chief Kaja Kallas recently said that a new European anti-drone system should be fully operational by the end of 2027. This follows an escalation in Russian drone incursions into NATO airspace in recent months in Poland and Romania, with separate incidents reported in Germany, Norway, Sweden and Lithuania.

However, Kallas warned that European NATO members must be fully prepared for possible conflict with Russia by 2030. ‘Danger will not disappear even when the war in Ukraine ends. It is clear we need to toughen our defences against Russia.’ The European Commission’s defence roadmap proposes strengthening the EU’s eastern borders and building air and space shields.

Cost is a critical factor in countering drones. NATO Secretary-General Mark Rutte has said ‘It’s unacceptable to shoot down drones costing one or two thousand dollars with missiles that may cost a million dollars. That’s been a big lesson from Ukraine. It’s become a competition of how cheap you can make a drone attack, and how expensive it is to defend against.’

Meanwhile, numerous European defence companies are developing anti-drone systems. This includes acoustic sensors that detect the drones buzzing, advanced optical cameras, with very high resolution and, increasingly sophisticated tactical radars capable of working over longer distances. Once detected a drone can be disabled by electronic jamming but both Russia and Ukraine are now using drones controlled by fibre optics or that can navigate autonomously. Such drones need to be intercepted or shot down.

It is not just the military investing in anti-drone technology. The private sector is now investing to protect critical infrastructure, entertainment venues and public events which, can now be considered a major security risk. The recent incident at Munich airport is a good example of how drone incursions can also disrupt air travel and inflict economic damage.

Defence shares have had a stellar run, and every time talk of a Ukraine peace deal surfaces succumb to profit taking. Even in the event of a peace deal, NATO will have to invest heavily in defence. Not only will it take many years to replenish some weapon stocks used up in the war in Ukraine but also to build new defences as warfare, such as the use of drones, continues to evolve.

 

What have we been watching?

 

The ongoing US government shutdown and poor US jobs data undermined equities last week which also saw US tech shares wobble as AI valuation bubble fears once again arose. However, the current week looks to have started on a more positive note with signs that an end to the shutdown may be in sight. Highlight of last week had to be Tesla’s shareholders who, approved Elon Musk’s pay package which, could reach a remarkable $1trillion if Tesla hits all of its maximum milestones including more than quintupling its market value to $8.5trillion! Think what that would do to US share indices, if achieved!

There were signs that US politicians might be more agreeable to ending the government shutdown, which is now the longest in US history. Over the weekend there was a 60-40 procedural vote in the US Senate to advance a bill that would end the shutdown. Betting sites are starting to price in the end game with a 98% expectation that the shutdown will be over by the end of this month. Once government departments re-open, then markets will face a surge of delayed US economic data releases.  

The US Supreme Court heard arguments in the case of Trump’s IEEPA tariffs which were previously ruled invalid by the lower courts. Betting sites lowered the odds of the Supreme Court ruling in Trump’s favour to 25%. This would impact many of the tariffs imposed so far this year although Trump may look to replace these with other statutes.

While Trump described his recent meeting with Xi Jinping as ‘amazing’, the US is still wary of China’s trade ambitions. Media reports suggest that the US has added ‘poison pills’ to the recently announced Asian trade pacts to counter China with conditions inserted into tariff deals with Cambodia and Malaysia seen as a ‘loyalty test.’

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In the UK, a speech by Chancellor Rachel Reeves highlighted difficult choices ahead of the Budget, implying an increase in income tax and a desire to go further than the minimum required in order to increase fiscal headroom. A downgrade to UK productivity is the main challenge and markets are currently assuming a fiscal deterioration of between £20-£30bn, hence why Labour could be forced into breaking its manifesto pledge. At least the UK gilt market was reassured as the Chancellor affirmed her ‘commitment to the fiscal rules is ironclad.’ There was also good news for the UK banks as the Chancellor is set to spare them from punitive Budget tax measures, after making it clear she wants the sector to remain competitive and able to support the country’s growth.

The Bank of England (BoE) kept interest rates on hold at 4% by a narrow 5:4 vote but wants to see evidence of inflation easing before it cuts, with more cuts if it is more clearly established that inflation is cooling. The BoE forecasts inflation to fall close to 3% in early 2026 and expects it to hit its 2% target in the second quarter of 2027. It also trimmed its UK economic growth forecast for 2026 from 1.4% to 1.3%. Markets currently expect a 61% chance of a 0.25% interest rate cut at the BoE’s next meeting in December although much rest on the forthcoming Budget. Markets then expect a further two cuts of 0.25% with the first of these possibly in February.

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In the US, elections across many states saw Democrat victories in New York City, New Jersey and Virginia, so an early sign of an anti-incumbent party swing ahead of the mid-term elections in a year’s time. While markets await publication of official US government economic data, delayed by the shutdown, investors have turned to other sources. Markets were rattled on Friday by jobs data from two private agencies that showed a big jump in job cuts which contrasted with more upbeat jobs figures and ISM services data earlier in the week. This saw the chances of a US interest rate cut in December by the Fed shift to 70%.    

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Chinese inflation surprised to the upside at +0.2% in October.  However, Chinese exports contracted unexpectedly while imports slowed. Electrical exports fell by 8% suggesting adjustment from earlier front loading ahead of Trump’s tariffs.

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Brent oil edged lower to $64 on higher US inventories and milder weather.

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Finally, sanctions imposed on Russia following its invasion of Ukraine continue to indirectly affect UK consumers. British fish and chip shops have suffered from a national shortage of cod which has driven up prices. Sanctions were imposed on Russia’s two largest fishing companies, Norebo and Murman Seafood, earlier this year by the EU, exacerbating restrictions on the number of cod that can be caught in the Barents Sea.

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.