Three core aspects that make defence stocks particularly appealing are the magnitude of investment, their longevity, and diverse investment opportunities, according to an asset manager.
Moreover, Trump’s second term is expected to provide a significant boost to US and European defence contractors.
Kim Catechis, investment strategist at the Franklin Templeton Institute, noted that while countries are rethinking their defence architectures, capital investment is set to exceed current expectations.
Moreover, the transformation of military capabilities creates an investment theme with a “decades-long runway”.
The data shows that global defence spending reached a record US$2.4 trillion last year, representing the ninth consecutive year of growth.
According to Betashares, this was the first time since 2009 that every region in the world experienced rising defence spending in 2023.
Speaking on the current diverse investment opportunities, Catechis reflected on the fact that along with the sector evolution, its definition has also broadened to include emerging technologies alongside the traditional armaments.
The new technologies include low-Earth orbit (LEO) satellite communications, AI-driven data systems or unmanned vehicles for surveillance and reconnaissance.
The example of non-traditional players includes Anduril and Shield AI who disrupt the defence sector by focusing on high-speed, multi-domain coordination.
“These companies, much like SpaceX and Palantir before them, are rapidly achieving unicorn status, reflecting their impact on the sector,” Franklin Templeton Institute’s strategist said.
She added that data suggested that approximately 850 funding rounds for such companies in the United States alone have taken place since 2018, signaling growing investor interest in these niches
Trump is “good news” for European and US defence stocks
Given the limited domestic options for defence stocks, Australian investors must look to overseas markets for exposure.
Cameron Gleeson, senior investment strategist at Betashares, noted that Betashares Global Defence ETF (ARMR) has 70 per cent invested in the US defence contractors while more than 25 per cent of the portfolio is invested in European countries.
Gleeson opined that a second Trump presidency would be favourable for European defence companies. However, the ultimate scale of Europe’s defence spending increase would depend on Trump’s ability to resolve the conflict in Ukraine.
“Our view is that, firstly, his positioning in terms of his NATO allies will be essential,” he told InvestorDaily.
“With Trump’s posturing, which was also apparent in his first term, it is clear that Europeans are going to need to be much more self-sufficient in their defence capabilities, which will be good for European defence companies.”
NATO members have committed to allocate at least 2 per cent of their gross domestic product to defence in their annual budget. According to Gleeson, Trump is expected to exert greater pressure on Europe-based NATO members to achieve these targets.
He also noted that 23 of NATO’s 32 members are projected to meet or exceed this target in 2024, compared to just three in 2014.
According to Betashares, this will further benefit key European defence contractors, such as Germany’s Rheinmetall or the UK’s BAE Systems.
Gleeson highlighted that both companies reacted positively following Trump’s victory, rising more than 16 per cent and 10 per cent, respectively, over the US election week.
Unsurprisingly, Trump’s second term is also expected to further boost the American defence companies, aligning with his ambition to champion American industry and manufacturing.
“Trump is also keenly focused on reducing the US’s trades deficits against other major trading partners, which is creating a strong tailwind for US defence contractors,” Glesson said.
He explained that part of Trump’s negotiations on tariffs and trade might force allied countries in Europe and Asia with a trade surplus against the US into purchasing weapons from US defence companies.
“Trump will likely be less restrictive as to which weapons technologies these companies are allowed to sell to friendly nations,” he said.
Gleeson highlighted that after the US election, the Pentagon announced a potential US$2 billion arms sale to Taiwan, with US company RTX Corp the principal contractor.
Moreover, last week the Pentagon also approved a US$385 million sale of aircraft parts and radar equipment to Taiwan from General Dynamics.
According to Betashares’ strategist, such deals help promote Trump’s ability to negotiate and make deals, enhancing his PR image.
“While Trump generally prefers to make deals than to start war, he wants to reassert US dominance in terms of military capabilities as a deterrent, and this requires increased US defence spending.
“Certainly during his first presidency, we saw an increase in defence spending,” Gleeson concluded.
