Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 578

A megatrend hiding in plain sight: defence

Information technology is not the only sector holding up share markets. There is another industry. We all rely on it, but the opportunity on ASX is scant. It’s a global sector hiding in plain sight.

Protecting its citizens and keeping them safe is the responsibility of governments. Since ancient times civilisations have grappled with this, and the changing technologies and material demands of protecting borders and populations are complex. More recently the cyber world has become a battleground, and the defence industry is again at the forefront of technology.

But when we read stories about defence spending, we do not normally associate this with investing. The reality is that governments are spending more than ever on defence, and much of the budget is being directed toward listed companies that are leaders in their fields. These companies operate in diverse sub-industries including aerospace & defence, and electronic equipment & instruments.

These sectors are typically under-represented in broad market benchmarks. The S&P/ASX 200 index has zero exposure to these military and defence industries, while the S&P 500 and MSCI World ex Australia indices have 1.95% and 1.98% exposure respectively.

For long-term investors, these sectors have historically outperformed the broader market.

Chart 1: Total cumulative index returns since 1989.

Source: Morningstar Direct 1989 to 31 August 2024. Past performance is not a reliable indicator of future performance. You cannot invest in an index.

Unhappily, the world has changed from countries celebrating the peace dividend, a term used to describe the economic benefits of a decrease in defence spending. Instead, countries are ramping up military expenditure.

We think there are three key reasons for investors to consider a defence allocation within a diversified equities portfolio.

1 – Spending by governments toward the sector is increasing

Although Australia is far removed from troubles plaguing other parts of the world, it is not immune from the flow over effects from uncertain times. In 2023, defence expenditure hit a record high and accounted for 1.92% of GDP and 5.06% of total government expenditure in Australia – a 6% increase from the previous year. Australia’s defence spending is set to increase further with the Government committed to spending 2.4% of GDP to this sector by 2033-34, which is roughly $100 billion.

It is a similar story for other NATO (North Atlantic Treaty Organisation) and NATO-friendly countries. NATO was founded in 1949 following WWII by Canada, United States and several Western European nations. This Alliance was created to provide political integration and collective security across the regions and now includes 32 countries. In 2014, NATO governments agreed to commit 2% of their national GDP to defence spending to help ensure the Alliance’s continued military readiness.

Compared to other parts of the world, the post-Cold War period has seen significant underinvestment in the defence sector by European nations. As a result, defence capability has suffered in many nations. This has begun to shift in recent years, with Germany a prime example.

A leaked Inspector General report on the state of the German army in 2022 highlighted poor results for functional weapons. It further implied the situation was even more dire in the other parts of the army. As a result, the German government passed a bill allocating €100 billion to a special defence fund and also announced intentions to increase its yearly defence spending.

Elsewhere, The Netherlands shifted policy and approved an additional €5 billion in defence investments and the UK announced that it would increase defence spending to 2.5% of GDP by 2030. This will inject an additional £75 billion over six years and retain the UK’s place as the second largest defence spender in NATO.

This year, 23 NATO allies are expected to meet or exceed the defence spending target, compared to only three Allies in 2014. This represents a significant increase in collective investment to the industry. NATO Allies have also agreed that at least 20% of defence expenditure should be devoted to major new equipment. This includes associated research and development, perceived as a crucial indicator for the scale and pace of modernisation.

Globally, data released by the Stockholm International Peace Research Institute (Sipri) for 2023 showed that global military expenditure grew 7% to US$2.43 trillion, the steepest annual rise since 2009 as international peace and security deteriorated.

Chart 2: World defence expenditure: 1992 to 2023

Source: Sipri, VanEck, figures are represented in constant 2022 US dollars.

2 – Demand for the sector’s products and services has not historically correlated to the economic cycle.

It is important to note that defence expenditure has historically been agnostic of the economic climate. Looking at chart 2 above, defence spending rose during the last three US recessions (the grey shaded area).

3 – The defence industry has historically been at the forefront of technological development and advancement

Military and defence sector companies generally invest heavily in research and development to create new technologies, inventions and products.

This can often lead to technological development and advancements that spill over into areas beyond military use to everyday life.  Some everyday products and innovations that have deep roots in the military sector include the internet, GPS satellite navigation, microwave ovens and super glue.

Additionally, in the modern world, defence strategies must consider a broad range of factors, beyond military and weapons, to effectively protect a country’s security and prepare for potential threats.

Cyber security, satellites and communications, analytics and event response software, and training services are now included in defence budgets and represent further growth opportunities for defence firms.

Australia’s first defence ETF, the VanEck Global Defence ETF (ASX: DFND) launched earlier this month on ASX.

Key risks: An investment in our defence ETF carries risks associated with: ASX trading time differences, financial markets generally, individual company management, industry sectors, foreign currency, country or sector concentration, political, regulatory and tax risks, fund operations, liquidity and tracking an index. Once available, see the PDS and TMD for more details.

 

Arian Neiron is CEO and Managing Director - Asia Pacific at VanEck, a sponsor of Firstlinks. This is general information only and does not take into account any person’s financial objectives, situation or needs. Investors should do their research and talk to a financial adviser about which products best suit their individual needs and investment objectives.

For more articles and papers from VanEck, click here.

 

  •   18 September 2024
  • 1
  •      
  •   

RELATED ARTICLES

A 2026 rotation story: Europe’s undervalued small caps

2022 outlook: buy a raincoat but don't put it on yet

banner

Most viewed in recent weeks

Why spending more in early retirement can improve lifetime income

Conventional wisdom encourages retirees to preserve superannuation. But if those likely to qualify for the Age Pension later in life spend a little more today, it may deliver higher lifetime income and a more stable retirement.

It’s time for LICs to die

A high-profile dividend cut and a prominent fund manager’s apology have reignited a long-running debate. If investors can access similar exposures more cheaply and efficiently elsewhere, what exactly is keeping LICs alive?

Testamentary trusts survived the trust tax. The drafting battle has just begun.

The fight over testamentary trusts looked settled. Then the draft legislation arrived. Hidden in a technical detail is a question that could force many families to rethink wills they thought were already future-proof.

Is it time to bail on Australian stocks?

For generations, Australian investors have backed banks, miners and dividends. But has that loyalty come at a cost? A look at the numbers raises an uncomfortable question about where future returns will come from.

The new capital gains tax trap for your portfolio

Investors have long accepted one portfolio rule without much question. A major tax shift could change that calculation entirely, forcing difficult trade-offs between risk, discipline and an overlooked cost lurking beneath.

How the typical Australian Family could save $844,350 in taxes

The value of a testamentary trust is not determined by wealth alone. Depending on circumstances, it can reduce the tax burden on inherited income, create efficiencies and help build intergenerational wealth.

Latest Updates

Fixed interest

Higher yields are creating opportunities in global bonds

Bond markets are adjusting to a new reality, but not in the ways investors expect. With markets repricing and capital competing for attention, investors may need to rethink where resilience and opportunity lie. 

Economy

Are we in a recession?

What if the warning signs are already everywhere? From supermarket aisles to company failures, investors are being bombarded with recession signals. But most face a different risk that can be just as dangerous for portfolios. 

SMSF strategies

Meg on SMSFs - Division 296 actuarial certificates

The tax bill might be yours, but the event that caused it may not be. A key Division 296 calculation can sometimes attribute earnings in ways that many SMSF trustees won't instinctively expect or fully appreciate.

Property

The first impact of negative gearing reform is not the tax bill

Negative gearing changes formally begin in 2027, but the first consequences may already be here. A subtle shift is quietly influencing who can borrow, how much they can access and which property strategies still stack up.

Economy

The oil market is running out of easy answers

The biggest threat to markets may not be what investors are watching. The numbers have stopped adding up and supply is harder to measure, with forecasts becoming simple guesses. A more fragile reality is being masked.

Investment strategies

The state of investor knowledge in Australia

Australians are investing more than ever, yet a surprising divide is emerging between those building wealth effectively and those making costly mistakes. Surprisingly, the gap has little to do with income, age or starting capital.

Taxation

Complexity and capital gains

A case study shows that the ‘30% minimum CGT’ is a poorly conceived tax that adds significant complexity to an already over-complex system. A less complicated model would create a much fairer progressive tax scale.

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.