A “new normal”: Tracking the rise of global conflict

ACLED's 2026 Conflict Index and Watchlist show a worsening global conflict environment with 185,000 violent events recorded in 2025, government forces directly involved in 74% of those events, and state-aligned military groups causing one-third of civilian exposure (up from 20% in 2020). Key figures include 7,692 conflict deaths in Syria, an 11% rise in fatalities from state–armed group engagements in Mexico following cartel fragmentation, and a 33% increase in confrontational protests; ACLED warns this sustained baseline of violence, expanded use of drones and information-warfare, and weakening adherence to sanctions and humanitarian norms raise geopolitical risk for affected regions and create a pronounced risk-off backdrop for asset allocators.

Analysis

Market structure: Persistent, geographically diffuse violence lifts demand for defense hardware, ISR (drones/sensors), cybersecurity and crisis logistics while weighing on travel, tourism, and EM consumer sectors. Expect pricing power to accrue to prime defense contractors and select cyber names as procurement cycles re-accelerate; semiconductor/sensor suppliers feeding drone stacks are secondary beneficiaries. Commodity effects are asymmetric: oil carries a positive risk premium; gold benefits as a flight-to-safety; shipping and insurance prices will rise on concentrated routes.

Risk assessment: Tail risks include a major regional escalation that pushes Brent >$20/bbl above spot within 30 days, broad export controls on key chips crippling drone supply chains, or cyber reprisals that disrupt critical infrastructure. Near term (days-weeks) we expect risk-off flows (USD up, equities down, Treasuries rally); medium term (3-12 months) procurement awards and fiscal re-prioritisation; long term (1-3 years) normalization of higher defense budgets and sustained elevated cyber spend. Hidden dependencies: prime revenue depends on multi-year appropriations and export-control regimes; insurers/reinsurers could drive risk premia in shipping and trade finance.

Trade implications: Favored trades are long large-cap defense (LMT, RTX, GD) and cybersecurity (CRWD, PANW), tactical long Brent via call spreads, and duration exposure via long TLT as a short-term portfolio hedge. Use 3–12 month option structures to monetise rising event volatility and employ pair trades (defense vs commercial aerospace) to isolate defence-rally alpha. Catalysts to watch: major incidents, US/EU budget votes, sanctions/ export-control announcements within next 30–90 days.

Contrarian angles: The market may be underestimating stickiness of cyber budgets—subscription models make CRWD/PANW revenues less cyclical—while defense equities may already price a lot of good news; a string of ceasefires or tighter fiscal discipline could pull back premiums. Historical parallels (post-2001 spikes then plateau) warn against 100% conviction in sustained multi-year outsized returns; prefer option-protected, time-boxed exposure and peel gains into rallies.

Key Decisions for Investors

• Establish a 2.5% long tactical allocation split equally across Lockheed Martin (LMT), RTX (RTX), and General Dynamics (GD) (≈0.83% each). Complement each equity with a 9–12 month call spread (buy ~50-delta call, sell a call ~20–30% OTM) to target asymmetric upside (~+20–30% over 12 months) while capping premium; trim if any name falls >15% or if US defense appropriations are cut materially within 90 days.
• Allocate 2.0% to cybersecurity exposure: 1.0% CRWD, 1.0% PANW via 6–9 month call or 25/40% call spreads to capture enterprise spend acceleration; target +25% upside over 6–12 months, stop-loss if option premium decays >40% before 60 days.
• Deploy 1.5% notional to oil upside: buy a 3-month Brent call spread (long ~5% OTM, short ~15% OTM) or equivalent BNO exposure. Exit rules: take profits at +20% on the instrument or cut if Brent falls >10% from entry within 30 days.
• Implement a 1% pair trade long LMT / short BA (Boeing) equal-dollar exposure over 6–12 months to isolate defense procurement upside vs commercial-cycle risk; target 8–12% relative outperformance, unwind if spread narrows by >7% or Boeing reports material commercial demand recovery.
• Raise 2–3% portfolio defensive duration via TLT (or long 10y futures) for a 1–3 month hedge against risk-off dislocations; offset with a 1% allocation to GDX (gold miners) as an inflation/flight-to-safety hedge and liquid rebalancing buffer.