Defence shares are booming as Trump, Middle East fuel expectations for government spending

Herald Sun

4 hours ago

Investors who bought into defence-focused companies and exchange traded funds months before Donald Trump was elected US president are laughing all the way to the bank.
As wars intensify and President Trump pressures allies to dramatically increase their defence budgets, hundreds of billions of extra dollars will soon be spent on countries' war machines – and a slice of that will flow to savvy investors.
Several global defence stocks have doubled their share price in the past year, while many others have climbed three times more than overall markets in the US, Europe and Australia, which are up eight per cent to 10 per cent. Analysts say the outlook remains strong, with the Israel-Iran conflict the latest in a string of international crises.
Unlike last year's AI boom, which largely focused on US companies, the defence boom spans many countries. However, some of the best-known US defence stocks Northrop Grumman and Lockheed Martin, have generated only meagre returns.
This global theme, combined with the fact that Australia does not have a significant listed defence sector, means many investors are looking to exchange traded funds for global exposure, and they have been rewarded so far.
Three ASX-listed defence ETFs debuted last year and have climbed between 55 and 74 per cent.
The best performer is the VanEck Global Defence ETF.
VanEck deputy head of investments and capital markets, Jamie Hannah, said flows into ASX-listed defence ETFs have surged since March as companies including Italy's Leonards SpA, Germany's Hensoldt AG and Britain's Babcock International enjoy 'triple-digit price growth in the last year'.
Mr Hannah said government spending is increasing across Europe, the US and Asia-Pacific, providing long-term revenue for defence companies.
'We often hear the term 'arms race' used in everyday contexts, but the literal meaning of countries competing for military superiority essentially describes the current geopolitical predicament,' he said.
'The thing about an arms race is that there is no finish line and no one can ever actually win the race, yet countries, even those unwilling, are compelled to participate in order to maintain national security.'
Mr Hannah said the VanEck ETF does not hold any Australian defence stocks, although clients have expressed interest in Droneshield, which is up 18 per cent in the past year.
Another Australian stock with defence exposure is Perth-based Austal, which is up 164 per cent over the past year. Backed by the billionaire Forrest family, it's attracted interest from South Korea's Hanwha Group.
Other local companies benefiting from defence spending include Codan, up 75 per cent, and Electro Optic Systems, up 109 per cent.
Equity Trustees Asset Management head of equities Chris Haynes said Trump 'wants everyone to be more self-reliant'.
Mr Haynes noted the June 5 decision by NATO Defence Ministers to strengthen the alliance's deterrence and defence capabilities, through a spending commitment of 5 per cent of GDP.
'In Europe, the NATO directive will require Germany to spend €40bn for a new infantry division,' he said.
'The political will has changed and the German chancellor says spending needs to go to 3-3.5 per cent of GDP. Rheinmetall Ag is a German company that will benefit as a result of this directly.'
Investors can buy overseas defence stocks directly through brokers and platforms, but will achieve more diversification buying broader funds that allocate their money throughout the sector.
Betashares senior investment strategist Cameron Gleeson said many global defence contractors, including Rheinmetall, BAE Systems and Palantir, have seen a significant increase in orders and new government contracts.
'Investors are seeking exposure to the earnings growth these companies are experiencing, as well as the long tail of innovation that increased defence spending often provides,' he said.
'However, while defence companies are showing strong performance, much of the growth is happening outside Australia. As a result, investors may wish to look beyond the ASX for exposure to more mature global players with diversified revenue streams and government-backed contracts.'
Mr Gleeson said investors should not focus solely on defence. 'Consider this sector for a satellite allocation, complementing a well-diversified core portfolio of Australian and international equities,' he said.
Stake markets analyst Samy Sriram said defence ETFs are benefiting from investments in Palantir Technologies, which provides AI-powered defence software and sensors and has surged more than 440 per cent in a year.
'Palantir is a major beneficiary of higher defence spending, as it relies on government contracts for revenue,' she said.
'It is the third most traded stock on Stake this year. Firms that are investing in AI will be seen as increasingly important to the defence sector.'
Stockspot CEO Chris Brycki said the shift to higher military spending started before Trump's re-election but his victory 'has added fuel to the fire'.
Mr Brycki said Germany's defence spending increase is a notable example after it 'broke from decades of fiscal restraint by lifting its post-WWII cap on military spending'.
'This was a major policy shift that signalled how seriously many countries are now taking security,' he said.
Originally published as Defence shares boom as wars intensify, company revenues surge Read related topics: Donald Trump