Defense Stocks Look Promising In The Year Ahead

This article first appeared in the January 2, 2019 issue of the Globe & Mail. The version below has been updated as of close of business January 29, 2019.

Headlines attest to the deteriorating global geopolitical environment. The United States has adopted a protectionist trading policy, Brexit is symptomatic of a host of problems facing the European Union, the North Korea nuclear issue remains unresolved, and the United States and China are engaged in a contest for global influence in the 21st century. These are but a sample of the macro issues that will challenge investors in coming years. However, turbulent times also produce opportunities. The defence sector is one such opportunity as it is well positioned to benefit from two converging influences.

 The anxiety and uncertainty produced by the current geopolitical climate has raised the risk of military conflict.  The United States’ withdrawal from global leadership has produced a multi-polar global order that has increased the number of potential theatres of conflict. China and the United States regularly sabre rattle in the South China Sea.  Iran and Saudi Arabia vie for influence in the Middle East.   Moreover, the Trump administration’s stated reservations about the European Union and NATO suggest a weakened Western coalition to adversaries.  It would not be surprising if Russia was emboldened to test the resolve of the NATO alliance. The United States may eventually tire of the lack of progress with North Korean de-nuclearization and resort to military intervention.  These are the major, though by no means only, areas of concern.

These geopolitical issues are driving military spending higher. The Trump administration authorized the biggest defence budget in American history, worth some U.S. $700 billion, in May. The United States accounts for more than a third of world spending on military equipment. China has also been aggressive in building its military capability and is now the second largest purchaser of weapon systems. Saudi Arabia has become a major buyer of military equipment as well and is now in third place globally. Increased defence spending is really a widespread phenomenon. For example, NATO increased its defence expenditures in 2016 for the first time since 2009 and raised spending again in 2017. This trend in global defence spending is expected to continue for the foreseeable future.

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Disclaimer: This article is intended for informational purposes only and does not constitute investment advice. The article reflects the views of the author at the time of writing and does not ...

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