An Australian ETF provider predicts that government spending on defence in the US, the world’s largest defence spender, is likely to remain high, which will attract increased investments in AI and cyber defence technologies.
“Based on the way the world is going regardless of [who wins the election] that number will be similar, if not slightly [higher] in 2024–25 unless there is a significant pull back in global conflicts,” Jamie Hannah, deputy head of investments and capital markets at VanEck Australia, told InvestorDaily.
He added that both Kamala Harris and Donald Trump, regardless of who wins the US elections later this week, will encounter similar challenges regarding defence expenditures.
“They might deal with them in different manners in how they are treated within the US but either way, both candidates, Harris and Trump, will have to commit to continued defence spending, given the current geopolitical outlook for the global economy,” he said.
In 2023, the US accounted for nearly 40 per cent of global defence expenditure, spending $916 billion – its highest defence spending level since World War II.
The world’s biggest economy was followed by China, which was the second biggest military spender, with US$296 billion, and Russia with US$109 billion.
Speaking to InvestorDaily, Hannah highlighted that the significant increase in defence spending is occurring across “much of the entire world”, including emerging markets.
“Unfortunately, countries around the world will continue to spend on defence and we don’t really see that changing in the short term,” he stated.
Trump versus Harris
Although neither candidate is expected to cut the defence budget, they might adopt “slightly different” approaches, according to Hannah, with Harris likely to be more predictable in her actions compared to Trump.
“We already know what Harris will do as the Democrats have been in power since some of the conflicts kicked off. And I think the way they are treating things is obviously consistent with the last three years’ broader policy and this will continue,” he said.
“From Trump’s point of view, it is difficult to [predict] exactly what he will do in terms of the underlying defence but needless to say you won’t see him winding it back [the defence spending].”
Hannah pointed out that during his previous term, Trump was adamant that European NATO members should meet the agreed-upon 2 per cent GDP defence spending threshold, a requirement that many now adhere to.
In 2018, during a visit to the White House, NATO secretary general Jens Stoltenberg gave the then president Trump credit for his leadership on the issue.
In fact, as of July, NATO reports suggest that more than two-thirds of its allies met their commitment to the 2 per cent GDP defence spending rule, with some member states even exceeding this threshold.
“From that perspective Trump’s policy has already had an impact across NATO, obviously [it is now] driven by the war in Ukraine, but needless to say Trump wants to see the government expenditures in that area,” Hannah added.
“From that point of view, how he does it might be different but the defence expenditure will be probably unchanged.”
Defence sector opportunities
Hannah believes that the increase in military spending will provide greater certainty for research and funding across various subindustries within the defence sector.
This includes aerospace, research and consulting services, application software, electronic equipment, instruments, unmanned vehicles, communications systems (such as satellites), critical cyber security, training simulation software, digital forensics, detection devices, and biometric identification.
VanEck’s deputy head also noted that the defence industry has been historically at the forefront of technological innovation and development, and many companies currently involved in this space are more technologically driven, therefore AI inside defence is another growing area.
“The new world is more ‘tech’ – cyber security, cyber warfare, security unmanned drones – a lot of this drives on technology. And technology drives on the most advanced computer chips and they also drive on some more advanced algorithms,” Hannah said.
“[These companies] are cutting edge, they are breaking new ground, and they are companies which arguably are providing some of a material advantage.”
VanEck recently launched its Global Defence ETF (DFND), Australia’s first defence-focused exchange-traded fund, on the ASX.
The ETF gives investors exposure to aerospace, defence and related tech industries, while excluding companies involved in controversial weapons like anti-personnel mines, biological and chemical weapons, cluster munitions, white phosphorus, and more.
Speaking to InvestorDaily late last month, Hannah said DFND has already sparked strong interest among investors looking to tap into the under-represented defence sector.
“Since DFND’s inception, it has returned 10.55 per cent to 24 October 2024. It has traded every day and currently has $12.2 million in assets and has averaged circa $371,000 daily since inception to yesterday,” he said.
Australia currently boasts three defence ETFs, with Global X launching its Defence Tech ETF (ASX: DTEC) to Australian shores in late September, followed by Betashares with its own iteration, the Global Defence ETF (ASX: ARMR), a couple of weeks later.
A recent report from the Stockholm International Peace Research Institute (SIPRI) indicated that global military spending increased by 7 per cent to US$2.43 trillion in 2023, the largest annual rise since 2009, with projections suggesting it could reach US$3.1 trillion by 2030.
Speaking to InvestorDaily in early October, Shane Oliver, chief economist at AMP, said: “The peace dividend of the 1990s started to give way to a new Cold War in the years just before the pandemic but unfortunately, it’s intensified since as evident by the conflict in Ukraine and arguably the Middle East. It’s also evident in the reversal of globalisation and trade wars that started under Trump 1.0.”
“This is now seeing a pickup in defence spending benefiting arms makers, many of which are listed on share markets. At the same time, investors are looking for a hedge against increased military conflict that may impact other investments,” Oliver said.
He, however, warned that while the launch of defence-focused ETFs “makes sense” and is “a sign of the times”, investors “just need to be wary that as with the first Cold War, it will wax and wane over time, leading to lots of volatility in defence stocks”.
“They need to be wary about buying after they have already had a big run-up and may be getting overvalued and over-loved.”
