According to one asset manager, three fundamental aspects that make defense stocks particularly attractive are the scale of investment, their longevity and the diversity of investment opportunities.
Additionally, Trump’s second term is expected to provide a significant boost to U.S. and European defense contractors.
Kim Catechis, investment strategist at the Franklin Templeton Institute, noted that as countries rethink their defense architectures, capital investments are expected to exceed current expectations.
Additionally, the transformation of military capabilities creates an investment theme with a “multi-decade runway.”
Data shows that global defense spending reached a record $2.4 trillion last year, marking the ninth consecutive year of growth.
According to Betashares, this was the first time since 2009 that all regions of the world saw an increase in defense spending in 2023.
Speaking on the various investment opportunities today, Catechis reflected on the fact that with the evolution of the sector, its definition has also expanded to include emerging technologies alongside traditional weaponry.
New technologies include low-Earth orbit (LEO) satellite communications, AI-based data systems, or unmanned vehicles for surveillance and reconnaissance.
Examples of non-traditional players include Anduril and Shield AI, which are disrupting the defense industry by focusing on high-throughput multi-domain coordination.
“These companies, much like SpaceX and Palantir before them, are quickly reaching unicorn status, reflecting their impact on the industry,” said Institute strategist Franklin Templeton.
He added that data suggests that around 850 funding rounds for such companies have taken place in the US alone since 2018, reflecting growing investor interest in these niches.
Trump is “good news” for European and American defense values
Given limited domestic options for defense stocks, Australian investors must look to overseas markets for exposure.
Cameron Gleeson, senior investment strategist at Betashares, noted that the Betashares Global Defense ETF (ARMR) has 70 percent invested in U.S. defense contractors, while more than 25 percent of the portfolio is invested in European countries.
Gleeson said a second Trump presidency would be good for European defense companies. However, the ultimate extent of Europe’s defense spending increase will depend on Trump’s ability to resolve the conflict in Ukraine.
“With Trump’s posture, which was also evident during his first term, it is clear that Europeans are going to have to be much more self-sufficient in defense capabilities, which will be beneficial for European defense companies.”
NATO members have committed to spending at least 2 percent of their gross domestic product on defense in their annual budget. According to Gleeson, Trump should put greater pressure on NATO members based in Europe to achieve these goals.
He also noted that 23 of NATO’s 32 members are expected to meet or exceed this target in 2024, compared to just three in 2014.
According to Betashares, this will also benefit the main European defense subcontractors, such as the German Rheinmetall or the British BAE Systems.
Gleeson highlighted that both companies reacted positively following Trump’s victory, increasing by more than 16 percent and 10 percent respectively during the US election week.
Unsurprisingly, Trump’s second term is also expected to further boost U.S. defense companies, in line with his ambition to defend U.S. industry and manufacturing.
“Trump is also working to reduce U.S. trade deficits relative to other major trading partners, creating a strong tailwind for U.S. defense contractors,” Gleeson said.
He explained that part of Trump’s negotiations on tariffs and trade could force allied countries in Europe and Asia with a trade surplus over the United States to buy weapons from defense companies American.
“Trump will likely be less restrictive on what weapons technologies these companies are allowed to sell to friendly countries,” he said.
Gleeson pointed out that after the US election, the Pentagon announced a potential $2 billion arms sale to Taiwan, with US company RTX Corp as the main contractor.
Additionally, last week the Pentagon also approved a $385 million sale of aircraft parts and radar equipment to Taiwan by General Dynamics.
According to the Betashares strategist, such deals help promote Trump’s ability to negotiate and make deals, thereby improving his public relations image.
“Although Trump generally prefers to make deals rather than start a war, he wants to reassert American dominance in terms of military capabilities as a deterrent, which requires an increase in American defense spending.
“During his first presidency, we certainly saw an increase in defense spending,” Gleeson concluded.
