The unprecedented increase in military spending will increase the profits of defense companies

Military expenditures are currently 60% lower than in the world. lower than during the worst years of the Cold War. However, the downward trend that began in the mid-80s is coming to an end, and we have years of increased military spending ahead of us. The beneficiaries will be producers of equipment and technologies. Many of these companies are listed on the stock exchange, and more and more orders should result in an increase in their profits.

Arms spending goes up sharply

Geopolitical tensions in the world have risen to levels not seen in years. We've been watching recently the first anniversary of the Russian invasion of Ukraine, tensions between Washington and Beijing are also increasing, resulting, among others, from from the appearance of Chinese balloons over the USA. The effect of this is the announcement of an increase in military budgets. This applies primarily to Europe, where announcements and the first real increases are the highest. However, this may cause an increase in defense spending on other continents, if only due to rising prices caused by increased demand.

Global defense spending is now 60 percent lower than lower than in the 60s, the worst years of the Cold War. Back then, defense spending accounted for over 6 percent of GDP. of world GDP, and in the US it was even more than 9 percent. GDP. They began to decline successively from the second half of the 80s, when there was a relaxation in relations with the Soviet Union. Then, as the bipolar division of the world disappeared, the fall in military spending accelerated. In 2021, global defense spending amounted to 2,2% of GDP. GDP ($2,1 trillion). There is also a clear disproportion within NATO. The U.S. spends 3,5% of its GDP on armaments. GDP, the European Union is only 1,5 percent. The USA is followed by China, with expenditures of USD 300 billion, although they account for only 1,7% of the total. GDP. Russia is fifth with spending at 4,0 percent. GDP.

Although there is no data for 2022 yet, it brought a trend reversal and an increase in spending. And also announcements of further budget increases. The biggest increases should occur in Europe, which feels the most threatened, and at the same time has reduced its military spending the most in the past. A significant increase in its military budget has been announced by Germany, which plans to spend more than 2 percent of GDP on a permanent basis. GDP (1,3% in 2021). Poland plans to spend 2023% of GDP on military in 3 GDP and in the following years increase these expenses to 5 percent.

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Interesting times are ahead for the defense industry

First of all, increasing orders may require investments, as the production of many items has been severely limited in the past, e.g. artillery ammunition, the production of which in the world does not keep up with the pace of its use in the conflict in Ukraine. This also applies to advanced equipment, such as multi-role aircraft, whose production process is complicated and lengthy. On the example of current defense orders made by Poland, it can be seen that the efficient delivery of some equipment is difficult and leads to the purchase of similar products from different suppliers. Poland has recently placed significant orders in South Korea, as the European and American industries have not been able to deliver the necessary equipment so quickly.

It seems that the arms industry has very good years ahead of it. This is clearly visible on the stock exchanges, where defense companies have done much better than the broader market over the past year. Their valuations are currently about 20-30 percent higher. higher than the market average. However, this bonus is clearly made up of the already announced spending increases. Over the past 12 months, the ITA ETF, which brings together defense and aerospace companies, has gained 3,7 percent, while S&P index fell by 9,9 percent. The growth leaders are Raytheon (RTX), Lockheed Martin (LMT) and Transdigm (TDG). And this even with the poor performance of Boeing (BA) in the commercial aircraft segment. European defense companies have also done well and are beneficiaries of the long-awaited recovery of European defense spending. This applies to e.g. Rheinmetall (RHM.DE) to Dassault (DSY.PA), Leonardo (LDO.MI) and BAE (BA.L).

About the author

Pawel Majtkowski - analyst eToro on the Polish market, which shares its weekly commentary on the latest stock market information. Paweł is a recognized expert on financial markets with extensive experience as an analyst in financial institutions. He is also one of the most cited experts in the field of economy and financial markets in Poland. He graduated from law studies at the University of Warsaw. He is also the author of many publications in the field of investing, personal finance and economy.