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Investing During Wars: Defense Stocks May Be A Secret Weapon

Last Updated March 18, 2024 9:25 AM
Giuseppe Ciccomascolo
Last Updated March 18, 2024 9:25 AM

Key Takeaways

  • Countries around the world are significantly increasing their military budgets.
  • Increased military spending can stimulate certain sectors like defense manufacturing.
  • But it can also divert funds from other important areas like education and infrastructure.
  • Investors looking to capitalize on this trend can consider investing in ETFs that track global aerospace and defense stocks.

In 2023, countries across the world escalated their defense spending to $2.2 trillion, marking a notable 9% surge from the preceding year, driven by heightened conflicts amplifying international tensions. With Russia’s relentless aggression in Ukraine serving as a stark reminder of the imperative for robust military capabilities, even traditionally pacifist regions are recognizing the urgency.

Moreover, the outcome of the U.S. presidential election may further catalyze NATO members to bolster their defense budgets. Consequently, it’s imperative to delve into the potential ramifications of this escalating expenditure on economies and markets, while identifying the prime candidates poised for profit.

Countries Spending On Defense Rose

Government spending constitutes one of the primary pillars shaping a nation’s economic landscape , alongside consumption, investment, and net exports. Intuitively, heightened military expenditure correlates with economic expansion. However, this correlation is nuanced, as governments operate within finite budgets, necessitating trade-offs between military investment and other sectors such as infrastructure and education.

Critics contend that a surge in military spending could stifle long-term growth and development by diverting funds away from vital sectors. However, empirical evidence suggests a complex interplay. Analysis by The Economist revealed  no consistent link between military outlays and economic growth across OECD nations.

However, disparities emerge between poorer and affluent nations. Research indicates  that in developing countries, lavish military budgets often hinder economic progress due to inadequate oversight and heightened opportunity costs. Conversely, in wealthier nations, such spending can catalyze growth.

Moreover, augmented military budgets stimulate employment not only within the armed forces but also across associated industries like weapons manufacturing and logistics. Recent trends underscore a shift towards bolstering domestic defense industries, fostering self-sufficiency and job creation.

In essence, while the impact of military spending on economic dynamics varies across nations, its role in employment generation and strategic industry development remains a critical aspect of economic policy and national security agendas.

Effects On The Market

The surging military expenditures necessitate funding, typically achieved through increased government borrowing. This influx of government bonds into the market translates to elevated yields. And they directly impact the fixed-income sector while exerting an indirect influence on other markets.

Elevated yields may divert investor attention away from stocks, cryptocurrencies, and other high-risk assets.

Furthermore, there exists an abstract yet significant potential impact: the notion that heightened military spending could mitigate conflict risk. While inherently intricate and challenging to quantify, consider this perspective: substantial investments in military and defense yield “dividends of deterrence,” diminishing the likelihood of invasion or entanglement in destabilizing wars that could wreak havoc on the economy and markets.

This underscores the pivotal role of peace and stability in fostering confidence among individuals and businesses, crucial components of any thriving economy.

How To Rise This Wave

Two years have passed since Russia’s incursion into Ukraine, igniting a remarkable surge in Europe’s military sector. Today, aerospace and defense stocks within the bloc are not just holding their ground against their US counterparts but are surpassing them. This marks a significant turnaround after decades of playing catch-up. This surge is a logical outcome, fueled by the ongoing conflict in Ukraine and escalating geopolitical tensions worldwide. These have bolstered the order books of major defense firms and their suppliers.

While European defense expenditure witnessed 4.5% growth in 2023, the average spending relative to the bloc’s economic size, standing at 1.6%, falls short of NATO’s mandated 2% commitment, binding most European nations. In essence, European countries must enhance their defense budgets by a quarter on average to meet their NATO obligations, signaling a compelling investment opportunity.

European aerospace and defense stocks used to widely underperform their US counterparts
European aerospace and defense stocks used to widely underperform their US counterparts, but that’s changed dramatically over time. And in the past three years, they’ve been outperforming. Source: Bloomberg/Finimize

However, the absence of ETFs solely dedicated to European aerospace and defense companies poses a challenge. Nonetheless, investors have recourse through options like the iShares Global Aerospace & Defence UCITS ETF  (ticker: DFND; expense ratio: 0.35%), VanEck Defense UCITS ETF  (DFNS; 0.55%), and Future of Defence UCITS ETF  (NATO; 0.49%), which track global stocks in this sector.

ETFs And Stocks Opportunities

One strategy entails constructing a mini core-and-satellite portfolio of aerospace and defense stocks. The “core” segment, where the majority of allocation lies, could incorporate one of the aforementioned global ETFs. Meanwhile, the smaller “satellite” portion could feature selected European aerospace and defense stocks based on individual research.

Key players such as Airbus , Safran , BAE Systems , Thales , Rheinmetall , Leonardo , Chemring , Dassault Aviation , Kongsberg Gruppen , and Saab  are among the prominent beneficiaries of expanding European military budgets. A prime example is Rheinmetall. The world’s leading manufacturer of artillery ammunition projects a 40% surge in sales to a record $10.9 billion in 2024. This underscores the sector’s promising outlook.


Please note that the contents of this article are not financial or investing advice. The information provided in this article is the author’s opinion only and should not be considered as offering trading or investing recommendations. We do not make any warranties about the completeness, reliability and accuracy of this information. The cryptocurrency market suffers from high volatility and occasional arbitrary movements. Any investor, trader, or regular crypto users should research multiple viewpoints and be familiar with all local regulations before committing to an investment.

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