By Colin Kruger
The Trump-brokered ceasefire in the oil-soaked Middle East won’t derail the momentum of two trades that have flourished under the cover of the world’s obsession with US tech giants: defence stocks and gold.
Global defence stocks have rocketed in response to a destabilised security environment that is driving the biggest rise in military spending since the end of the Cold War.
Big spenders: US President Donald Trump speaks with Dutch King Willem-Alexander and Queen Maxima, and NATO Secretary-General Mark Rutte (rear centre), at the summit in The Hague on Tuesday.Credit: AP
Gold has also soared to record highs as central banks and investors around the globe grasp for the age-old haven asset amid the economic and geopolitical chaos.
US President Donald Trump hailed the “monumental” outcome of this week’s NATO meeting, which concluded with a pledge from member states to more than double defence-related spending from 2 per cent of gross domestic product to 5 per cent by 2035. This includes a 3.5 per cent spending commitment on core defence such as troops, tanks and weapons.
The only safe prediction in this environment is that global spending on defence will continue to soar as Trump threatens to pull the security rug from under long-term allies, triggering a global military upgrade not seen since the end of the 1980s.
“Let me salute President Trump’s long-standing leadership in calling for NATO to increase defence spending,” NATO Secretary General Mark Rutte told the assembled EU leaders at the defence organisation’s opening dinner in the Netherlands.
SPI Asset Management’s managing partner Stephen Innes has a pithy description for NATO as it’s being reassembled by Trump, calling it a “procurement cartel with teeth”.
“This summit isn’t just a diplomatic checkpoint,” he writes in his The Dark Side Of The Boom newsletter. “It’s a test of whether Trump can turn NATO from a post-WWII relic into a 21st-century war economy alliance. The market implication? If 5 per cent becomes baseline, defence stocks stop being cyclical – they become structural. And that changes everything.”
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.
‘If 5 per cent [of GDP] becomes baseline, defence stocks stop being cyclical – they become structural. And that changes everything.’
Stephen Innes, SPI Asset Management
SIPRI highlighted the “guns or butter” cost to social programs from the rising spending on weaponry.
“As 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,” warned SIPRI researcher Xiao Liang.
The big beneficiaries from this war trade are traditionally US defence giants, such as Northrop Grumman – maker of the B-2 stealth bombers and intercontinental ballistic missiles – 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 Germany’s new government signalled a seismic shift in March, with plans to lift strict spending controls to create a €500 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.
Korea’s 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 – a maker of anti-drone technology – 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.
“Global 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,” VanEck’s 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: “Defence 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.”
In April, UBS Asset Management – which oversees $US1.8 trillion in investments – 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.
“It’s very much an area where you need to consider what you’re investing in,” 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 – the most in 50 years of data.
And central banks have not been the only buyers. This month, VanEck noted that Australia’s most recent export figures included $11 billion in “non-monetary” gold exports to the US – which is gold acquired by private buyers, not reserve banks, for their foreign exchange reserves.
“This 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,” VanEck’s Cameron McCormack said.
While some are getting squeamish after this year’s 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. “In the event of a recession, Goldman Sachs Research forecasts that gold could rise to as much as $US3880 a troy ounce,” the investment bank says.
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