Defence stocks in a new NATO era
Last year in September during the US chaotic retreat from Afghanistan we introduced our defence theme basket consisting of 25 defence stocks. In our note we highlighted that if the EU27 countries lifted their military budgets to the agreed 2% of GDP then the military industry could see a 8.4% growth rate over the following decade.
The EU27 bloc spent 1.2% of GDP in 2019 on defence corresponding to €168bn and the talks in Brussels are already mustering around the need to increase the military budgets and increase coordination on key security issues such as the Arctic area, the Baltic Sea, and EU’s outer borders. The EU27 military spending is down from 1.6% of GDP in 1995 and it is very likely that the EU27 bloc will over time move back to 1.6% and beyond offsetting the reduction and reliance on the US military umbrella. If we assume trend growth for EU27 and military spending goes to 2% by 2030, then the bloc will spent €346bn in 2030 translating into 8.4% annualized growth over the next nine years. If we assume 1.6% of GDP on defence by 2030 then annualized growth in spending will be 5.7%.
With the recent conflict in Ukraine the incentives to increase military budgets have gone up considerably and our defence theme basket has also been one of the best performing baskets this year. The list below shows the basket constituents.
|Raytheon Technologies Corp||139,339||13.8||319.7||12.1||58.3|
|Lockheed Martin Corp||105,243||2.5||5.6||5.8||66.6|
|Northrop Grumman Corp||61,075||-3.1||29.2||4.4||73.9|
|General Dynamics Corp||59,933||1.4||1.4||8.9||28.3|
|L3Harris Technologies Inc||42,703||-2.1||39.4||12.6||116.2|
|TransDigm Group Inc||35,993||2.9||17.4||14.0||209.3|
|BAE Systems PLC||25,359||3.3||29.5||6.1||20.3|
|Rolls-Royce Holdings PLC||13,334||-22.4||NA||10.2||-53.2|
|Howmet Aerospace Inc||14,477||-5.5||4.8||16.0||43.9|
|Dassault Aviation SA||10,887||-14.4||-28.0||11.9||13.3|
|Elbit Systems Ltd||7,705||12.1||30.3||-4.2||38.7|
|Kongsberg Gruppen ASA||5,697||7.2||29.9||11.9||183.8|
|Ultra Electronics Holdings PLC||2,955||0.0||4.4||-1.8||83.5|
|QinetiQ Group PLC||1,979||7.2||-9.1||33.2||3.3|
|Babcock International Group PLC||2,080||0.2||-94.4||21.1||-60.1|
|Chemring Group PLC||992||-2.3||-2.5||34.1||46.3|
|Avon Protection PLC||421||0.7||-98.8||69.2||10.1|
Source: Bloomberg and Saxo Group