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We flag that this article contains careful discussion of aspects of recent conflicts for anyone who is sensitive to such content.
Recent global conflicts have highlighted a significant shift in how wars are fought. The growing use of both aerial and maritime drones is changing the economics of conflict, challenging long-held assumptions about military power and defence spending.
For investors, developments such as these are not just geopolitical headlines. They have direct implications for global markets. In this article, we explore how the rise of drone warfare is reshaping modern conflict and what this could mean for global markets and long-term investment decisions.
Azerbaijan: Proving the Concept
In October 2020, small propeller-driven aircraft with no pilots flew over the mountains of Nagorno-Karabakh and changed warfare forever. Turkish-made drones costing under 5 million dollars operated by Azerbaijan armed forces obliterated what military observers had assumed was a formidable Armenian defence. They destroyed tanks, artillery, logistics convoys, and air defence systems extremely efficiently. Armenia had every conventional military advantage on paper. Within six weeks, it had capitulated.
Drones had permanently altered the cost structure of warfare. From that point forward, financially outmatched opponents could deny air superiority and destroy conventional military equipment in a way not seen before in modern history.
Ukraine: The Weapon Nobody Was Watching
When people discuss drones, they typically mean unmanned aerial vehicles (UAVs). However, the uncrewed surface vessel (USV) ‘drone boat’ showed its effectiveness in 2022 when Ukraine began deploying them to target warships of Russia's Black Sea Fleet.
A $50,000 drone boat sank the Sergey Kotov, a Russian patrol vessel valued at $65 million. The fleet was forced to relocate its entire operational base hundreds of miles east to Novorossiysk.
The control of the seas was suddenly no longer the privilege of the most powerful, expensive navies.
The Houthis: Very Alarming!
If Ukraine demonstrated that cheap drone boats could defeat extremely expensive conventional navy assets, the Houthis demonstrated something arguably more alarming: that even a technologically primitive terrorist group, operating under sanctions and aerial bombardment, could use drones to shut down one of the world's most critical trade routes.
Between late 2023 and 2024, Houthi forces in Yemen reduced container shipping through the Red Sea by roughly 90%.
Their weapons were simple. Drone boats packed with explosives struck multiple vessels, sinking the Tutor cargo ship in July 2024. Coordinated attacks combining drone boats, aerial UAVs, and ballistic missiles followed through 2025 and into 2026. Their weaponry cost a fraction of the naval assets deployed to unsuccessfully counter them.
The Strait of Hormuz: The start of the End for the Conventional Navy?
Since the US and Israel launched strikes against Iran on 28 February 2026, Iran has deployed its full spectrum military capabilities simultaneously. The result was the effective closure of the Strait of Hormuz, the bottleneck through which approximately 20% of the world's oil and gas normally flows.
The aerial drone campaign was expected. Iran's Shahed-136, with a range of 700 to 1,000 kilometres, has been battle-tested extensively through Russian deployment in Ukraine. It has evolved since then, with fibre-optic guidance to defeat jamming, jet-powered variants and coordinated swarms. What wasn’t as widely expected was Iran's drone boat campaign.
In early March, the MKD VYOM was struck by an Iranian uncrewed surface vessel in the Gulf of Oman. Iran has since deployed explosive laden craft disguised as wooden fishing vessels, indistinguishable on radar from the tens of thousands of legitimate fishing boats working these waters. Iran can reportedly control swarms of ten boats from a single operator.
Iran’s aerial drones and drone boats have been enough to put the US navy off escorting boats through the strait, which also has over 6,000 mines that remain a serious risk. It’s remarkable that the most powerful, expensive navy the world has ever seen has deemed it too dangerous to secure a c. 100-mile stretch of water controlled by a military force President Trump claims the US has ‘completely defeated’. This is because one drone or missile getting through is enough to sink an aircraft carrier, destroyer or a super tanker. The US near monopoly of domination of the seas now appears to be over.
Modern Warfare: The Asymmetric Cost
In the first 16 days of the Iran war, U.S. forces fired an estimated 402 Patriot interceptors, according to analysis by the Payne Institute. This is concerning, given that Lockheed Martin currently only produces about 600 PAC3 interceptors a year. Payne Institute estimates also suggest around 198 THAAD interceptors, which could be up to 40 percent of the prewar inventory, were fired in those first 16 days. The rate at which high end missile defence inventories were expended has raised questions about how sustainably these could be used in a long conflict.
Iran deliberately uses volume and variety in its attacks to exploit gaps in multi-layered US made air defences, forcing expensive defensive responses at an unsustainable rate. It is not sustainable for Western militaries in the long term to repeatedly intercept drones costing <$20,000 with interceptor missiles costing millions of dollars.
Imagine being Saudi Arabia or the UAE. Over the years, you have spent hundreds of billions of dollars purchasing anti-missile and anti-aircraft systems from the US. Now, you see relatively cheap drones penetrating these defence systems like a hot knife through butter. This has to be frustrating. What is the point of spending >$100m on a fighter jet and >$200mn on air defence system, if these can be taken out by drones at a fraction of the cost? Surely now, the evidence suggests it is wiser to invest in thousands of far cheaper drones.
What it Means for Investment Decisions
The conflict in the Persian Gulf is demonstrating the transforming nature of how war is fought. A state or terrorist group with modest industrial capacity, basic electronics, and a coastline can now damage the world's largest military powers, regardless of conventional superiority. Spending millions of dollars to shoot down drones worth 10s of thousands of dollars is not sustainable.
We have also seen that western defence systems are not as watertight as hoped. One of the major surprises was that Iran managed to take down US radar installations worth billions of dollars within hours of the conflict starting. Extremely expensive, mainly US made, air defence systems across the middle east have been repeatedly breached by Iranian drones and missiles. And with the US potentially leaving the region in a complete mess, claiming their goals have been accomplished, are the likes of the UAE, Kuwait, Bahrain, Saudi Arabia and Qatar likely to continue feeling compelled to buy billions of dollars of US weapons.
The whole world has been watching. At the time of writing, defence stocks are currently down roughly 12% in aggregate from where they stood at the start of the conflict. I wonder if this is reflecting an expectation that armed forces will not invest as much in state-of-the-art equipment like jet fighters, missile defence systems or multibillion dollar aircraft carriers that could all be destroyed by drones or drone boats. This could have profound effects on household name defence contractors- it seems plausible that this is what markets are starting to price in with the recent drops. How defence manufacturers shape their products and services for changing warfare will be key to their future profits.
Closing Thoughts
Changing warfare matters because it is rapidly reshaping who holds geopolitical power, and that, in turn, drives global economic outcomes and asset prices. As new technologies lower the cost of projecting force and erode traditional military advantages, established powers can find their deterrence weakened while agile, tech savvy states and non state actors gain disproportionate leverage. That shifts the balance of power in critical regions, affecting energy security and trade routes. Markets then reprice this shifting risk: we have seen this recently with the strong performance of energy stocks, while exposed sectors like aviation, tourism, and energy importing economies have suffered. At the same time, persistent geopolitical tension can reinforce on shoring, industrial policy and higher fiscal deficits, with implications for inflation, interest rates and currency valuations, meaning that investors increasingly have to treat the evolution of warfare not as a tail risk event but as a central driver of country risk, sector performance and longterm asset allocation.
I have focused on just one aspect of how the World is changing. There are countless themes that are shaping how civilisations continue to evolve. All of these themes in some way affect economies and asset prices. Some of the most talked about ones currently are AI, isolationism and tariffs but the list is endless. We are constantly considering these themes when shaping portfolios for the future. While it is impossible to predict exactly how situations will evolve, maintaining a prudent, sensible investment strategy is key to navigating periods of uncertainty.
At Two10 Investment Services, we support clients across Longridge, Preston and the Ribble Valley in making informed decisions, helping them stay focused on their long-term goals despite short-term market movements.
If you would like to discuss how current global developments may impact your investments or retirement plans, please get in touch with our team.
