The Stockholm International Peace Research Institute (SIPRI) estimated that global military expenditure hit a record $US2.7 trillion ($4.1 trillion) in 2024, an increase of 9.4 per cent in real terms from the previous year, and the steepest annual jump since the Cold War ended.
โIf 5 per cent [of GDP] becomes baseline, defence stocks stop being cyclical โ they become structural. And that changes everything.โ
Stephen Innes, SPI Asset Management
SIPRI highlighted the โguns or butterโ cost to social programs from the rising spending on weaponry.
โAs governments increasingly prioritise military security, often at the expense of other budget areas, the economic and social trade-offs could have significant effects on societies for years to come,โ warned SIPRI researcher Xiao Liang.
The big beneficiaries from this war trade are traditionally US defence giants, such as Northrop Grumman โ maker of the B-2 stealth bombers and intercontinental ballistic missiles โ which is now trading near multi-year highs. Virginia-based RTX, which makes the Javelin and Stinger missiles that were used heavily in the Ukraine war, has also hit record highs.
But the changing nature of warfare, where computer-guided drones and new technology such as AI are coming to the fire, has thrown up some new winners.
Shares of US tech group Palantir have soared more than 400 per cent in a year as the company cements its place in the US industrial military complex.
And investors are also noticing the impact in Europe, where Germanyโs new government signalled a seismic shift in March, with plans to lift strict spending controls to create a โฌ500 billion ($896 billion) fund for defence and security.
It has had a massive impact on European stocks. Italy-based aerospace, defence and security firm Leonardo, German sensor technology company Hensoldt, and British aerospace and defence company Babcock International have seen their share prices more than double over the last year.
Koreaโs Hanwha Aerospace is another EU beneficiary, and its share price has soared 200 per cent over the same period.
Even Australia benefits, as shown by Hanwha recently acquiring a 9.9 per cent stake in local shipbuilder Austal, with plans to double its investment. Austal shares have tripled since last September, thanks to its contracts with the US Navy.
ASX-listed DroneShield โ a maker of anti-drone technology โ has tripled since February. And right on cue, it announced a $61 million European military order on Wednesday for handheld detection and counter-drone systems. This one deal exceeds its entire revenue for 2024.
Three ASX-listed defence ETFs (exchange-traded funds, which invest in defence stocks globally) from VanEck, Betashares and Global X are all up 50 per cent this year.
โGlobal defence has been one of the few equity segments that have outperformed the market this year. Flows into ASX-listed global defence ETFs have shot up since March,โ VanEckโs Jamie Hannah said.
The surge in the performance of defence stocks has posed a conundrum for some ethical funds and investment mandates, which have generally precluded any military assets.
But investors appear to be coming to the conclusion that Citi reached in 2022: โDefence is likely to be increasingly seen as a necessity that facilitates ESG as an enterprise as well as maintaining peace, stability and other social goods.โ
In April, UBS Asset Management โ which oversees $US1.8 trillion in investments โ scrapped prohibitions that prevented its sustainable funds from investing in conventional military weapons manufacturers. Exclusions still apply to more controversial weaponry such as cluster munitions.
Hannah says VanEck already screens out these more controversial manufacturers from its ETF.
โItโs very much an area where you need to consider what youโre investing in,โ Hannah said.
Meanwhile, the only controversy over the ultimate defensive asset, gold, is whether it has peaked after a spectacular run over the past year to a record high of $US3500 an ounce in April.
This month, a European Central Bank report confirmed that its soaring price, along with bullion buying by central banks, means gold is currently the second-biggest reserve holding by central banks behind the US dollar.
Citi highlighted the extraordinary rush to gold with a report saying 0.5 per cent of global GDP was being spent on gold โ the most in 50 years of data.
And central banks have not been the only buyers. This month, VanEck noted that Australiaโs most recent export figures included $11 billion in โnon-monetaryโ gold exports to the US โ which is gold acquired by private buyers, not reserve banks, for their foreign exchange reserves.
โThis volume of gold exports for the quarter is more than the total non-monetary gold we have shipped to the USA in the last four years, and we think this could reflect a massive increase in demand from investors due to a loss of faith in [the US dollar] and US Treasuries,โ VanEckโs Cameron McCormack said.
While some are getting squeamish after this yearโs 27 per cent gain for the precious metal, others are expecting its golden run to continue.
Wall Street giant Goldman Sachs predicts gold will climb to $US3700 a troy ounce by the end of the year, from about $US3330 currently, as central banks keep buying tonnes of it every month.
It could rise even further if investors use bullion as a safe space ahead of interest rate cuts and amid rising recession concerns. โIn the event of a recession, Goldman Sachs Research forecasts that gold could rise to as much as $US3880 a troy ounce,โ the investment bank says.
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