International investors with an eye on the news will have been aware of some seismic shifts lately.
At the recent Munich Security Conference, US Vice President Vance made it clear to the European NATO nations that they will have to do more to strengthen their own defence capabilities and security. Next came the much-discussed White House visit by Ukraine’s President Zelenskyy.
European and Asian governments have now expressed a commitment to spend a greater percentage of their GDP on national defence, largely due to this American pressure. It’s no real surprise, then, that defence-related goods and services have been a hot ticket in terms of recent stock market outperformance.
European nations, led by the United Kingdom, France and Germany, are in the vanguard – with plans already in place to drastically increase their defence spending. Germany is looking to move immediately, even before the accession of its new government, to amend its constitution to exempt defence spending above one percent of GDP from its self-imposed ‘debt brake.’ In a move to spur growth, Berlin has also decided to create a €500bn infrastructure fund and will allow the individual states to run budget deficits.
Our view is that this all adds up to an enduring secular opportunity
In the EU, leaders are looking at a mechanism where all countries will support a bond offering to fund investments in defence and technology. The use of untapped post-pandemic recovery loans is also in play. The message is clear: Europe expects to spend significant sums on defence over the next decade.
In Asia, also, we’re seeing a similar shift in momentum, most significantly in Japan. Here, until recently, its defence industry was stymied by a post-WWII restraint on the export and production of defence products and services. That has changed and Japan is now committed to allocate 2% of its GDP to defence spending.
Our view is that this all adds up to an enduring secular opportunity – and it’s one that we have long had in our sights. Over the last few years, we have seen the weakening of multi-national organisations, rising geopolitical tensions and a stronger commitment by countries to invest in their own security. Against this backdrop, we believe governments will continue to spend on defence, whatever may be the peace developments in Gaza and Ukraine in the coming months.
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