“Defense spending is rising amid geopolitical fragmentation. This megaforce could shape market dynamics for years to come – yet may be underappreciated by investors. An active, selective approach to capturing the full spectrum of defense investments can offer alpha potential. Including defense exposure can enhance diversification and resilience in equity portfolios, particularly during times of geopolitical uncertainty. Geopolitical fragmentation is driving a surge in global defense spending. This reached an unprecedented $2.7 trillion last year — an increase of 9.4% in real terms from 2023 and the steepest year-onyear rise since at least the end of the cold war. The increase in spending is widespread with over 100 countries around the world raising their military spending in 2024.1 Potential underinvestment in defense Gain diversification and defensiveness. To put in context the relevance of defense as a theme, we compare it to another top-of-mind theme: A.I. As shown in the chart below, US defense spending comprises ~3.5% of US GDP (solid yellow line) and it is anticipated that it will reach 5% by 2035.2 Investment in A.I.-related construction including data centers, electric power utilities, and computer manufacturing sites, is less than 1% of GDP (solid black line) and has already doubled since 2018.”
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