Three main aspects that make defense stocks particularly attractive are the scale of investments, their longevity and diverse investment options, according to an asset manager.
In addition, Trump’s second term is expected to give a significant boost to US and European defense contractors.
Kim Katechis, investment strategist at the Franklin Templeton Institute, noted that as countries rethink their defense architectures, capital investment is expected to exceed current expectations.
Moreover, the transformation of military capabilities creates an investment theme with a “decades-long track”.
The data showed that global defense spending reached a record $2.4 trillion last year, marking the ninth consecutive year of growth.
According to Betashares, this is the first time since 2009 that any region in the world has experienced rising defense spending in 2023.
Speaking about the current diverse investment opportunities, Catechis reflected on the fact that along with the evolution of the sector, its definition has also expanded to include emerging technologies alongside traditional armaments.
New technologies include Low Earth Orbit (LEO) satellite communications, AI-driven data systems, or unmanned surveillance and reconnaissance vehicles.
Example non-traditional players include Anduril and Shield AI, which are disrupting the defense sector by focusing on high-speed, multi-domain coordination.
“These companies, like SpaceX and Palantir before them, are rapidly achieving unicorn status, reflecting their influence on the sector,” said institute strategist Franklin Templeton.
He added that data shows that roughly 850 funding rounds for such companies in the US alone have taken place since 2018, signaling growing investor interest in these niches.
Trump is ‘good news’ for European and US defense stocks
Given the limited domestic options for defense stocks, Australian investors should look to overseas markets for exposure.
Cameron Gleason, 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.
Gleason opined that a second Trump presidency would be favorable for European defense companies. The ultimate scale of Europe’s defense spending increases, however, will depend on Trump’s ability to resolve the conflict in Ukraine.
“Our view is that first and foremost, its positioning vis-à-vis its NATO allies will be essential,” he told AlecNews.Com.
“With Trump’s posture, which was also evident in his first term, it is clear that the Europeans will have to be much more self-sufficient in their defense capabilities, which will be good for European defense companies.”
NATO members have committed to allocating at least 2 percent of their gross domestic product to defense in their annual budget. According to Gleason, Trump is expected to put more pressure on Europe-based NATO members to achieve these goals.
He also noted that 23 of NATO’s 32 members are expected to meet or exceed that goal in 2024, compared with just three in 2014.
According to Betashares, this will further benefit key European defense contractors such as Germany’s Rheinmetall or Britain’s BAE Systems.
Gleason emphasized that both companies have responded positively since Trump’s victory, rising more than 16 percent and 10 percent, respectively, during the week of the U.S. election.
Not surprisingly, Trump’s second term is also expected to further boost US defense companies, in line with his ambition to protect US industry and manufacturing.
“Trump is also highly focused on reducing the U.S. trade deficit with other major trading partners, which creates a strong tailwind for U.S. defense contractors,” Gleason said.
He explained that part of Trump’s talks on tariffs and trade could force allies in Europe and Asia with trade surpluses against the US to buy weapons from US defense companies.
“Trump is likely to be less restrictive about what weapons technology these companies are allowed to sell to friendly nations,” he said.
Gleason pointed out that after the US election, the Pentagon announced a potential US$2 billion arms sale to Taiwan, with US company RTX Corp as the prime contractor.
In addition, the Pentagon last week also approved the sale of aircraft parts and radar equipment to Taiwan by General Dynamics worth US$385 million.
According to the Betashares strategist, such deals help boost Trump’s ability to negotiate and make deals, improving his PR image.
“While Trump generally prefers making deals to going to war, he wants to reassert US dominance of military capabilities as a deterrent, and that requires increasing US defense spending.”
“Certainly, during his first presidency, we saw an increase in defense spending,” Gleason concluded.
