Some economists suggest that the global defense industry has been on the rise in the last year due to the clash in Ukraine and the turbulent geopolitical environment worldwide.
After years of low spending on the defense sector, countries seem to be reevaluating their plans and budgets to be able to defend themselves.
New weapons orders and increased military spending attract investors’ attention as the defense industry expands. In this blog, we will share some valuable insights regarding the global defense industry.
Table of Contents
Clash in Ukraine leads to increased defense spending
The clash between Ukraine and Russia, which started on February 24th 2022, surprised many geopolitical and defence analysts who hadn’t been expecting such a deterioration. The United States and the European Union decided to support Ukraine by any means possible, Russia focused on adjusting its economy to the new conditions.
Rivalry in South China Sea fuels defense spending
The ongoing tension between China and Taiwan has sparked one more rally in military spending. China (or the Peoples’ Republic of China as its official name is) does not recognise Taiwan (officially the Republic of China) and considers it a renegade province. Chinese authorities have expressed the will to unify the island of Taiwan with the mainland many times in the past.
Increased demand for weapons, low supply
Despite the need for more weapons, the problem that has come up is supply. The absence of any military conflict on European soil for the last 24 years made countries on the old continent neglect their arms supplies.
As China and Russia had not been involved in any conflicts, the US was the only country that invested large amounts of funds in arms. In the past, the US expressed their concern to NATO allies, urging them to increase their military budget to 2% of their annual GDP according to the alliance’s rules.
China, US, UK and Germany increase their defense budgets
On March 5th, the Chinese Ministry of Finance announced that the country is set to increase defense spending this year by 7.2% to $230 billion, the most significant increase since 2019.
For the fiscal year that ends on September 30, 2023, the U.S. government authorised expenditure on defense of more than $800 billion in December. The budget proposal also emphasised the need to resist Chinese and Russian military capabilities in addition to domestic inflation. A Reuters report suggested that Russia plans to spend over $600 billion on national defense and security in the next two years.
A few days after the clash in Ukraine started, the German chancellor Olaf Scholtz announced in the Bundestag that Germany would increase defense spending to 2% of GDP. Furthermore, he pledged to set up a special 100 billion euro fund to finance the needs of the German armed forces (Bundeswehr).
In the UK, the government vowed to increase its defense spending based on the review of the country’s foreign, defense and security policy published in March 2021. While Liz Truss had pledged to lift the budget to 3% of GDP (an extra £157 billion) by the end of the decade, the UK’s prime minister Rishi Sunak has made no such commitment. However, speaking to the press during his visit to the US, Sunak said that he plans to increase the UK’s defense budget by £5bn over the next two years.
The European Defense Agency (EDA) published its annual Defence Data report for 2020-2021 in December 2022. The report showed that the EU countries spent 214 billion euros to boost their defence capabilities in 2021, 6% more than the previous year. 2021 was the seventh year in a row that defence spending increased in the old continent.
Investments in defense industry increase
The defense industry worldwide has been boosted by new orders as governments worldwide have scrambled to upgrade their military capabilities. Defense firms such as Lockheed, Raytheon, Boeing, Northrop Grumman, Dassault and others have stepped up their game as they push their products to markets that hadn’t been at the forefront up until now.
Commenting on the US defense budget, analysts at Credit Suisse noted: “We highlight that geopolitical tension/anxiety has historically been the driving force behind past defense budget trends, and we expect this time to be no different.”
According to a CNBC report, geopolitical developments in Europe have served as tailwinds for the US defense industry as the iShares U.S. Aerospace & Defense ETF (ITA), which tracks the performance of U.S.-listed aerospace and defense stocks, rose 8.8% in 2022.
Economists urge caution regarding defense investments
Market analysts note that investing in the defense industry is not all roses. Although defense spending has increased around the world, investing in the industry does not come with any profit guarantees.
Economists suggest that investors should be aware that the typical lifespan of a defence project is many years, which means that any type of conflict is unlikely to result in significant revenue growth in the near future.
Profit margins for large military companies are far higher for the development of innovative new weapon systems than for the sale of individual missiles or ammunition.
How to invest in the defense industry
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.