Credit Suisse said investors should buy defence stocks on the back of rising spending in the sector, a potential hedge to the US presidential election and increasing global political tensions.
The Zurich headquartered firm sees several indications that global defence spending is likely to pick up going forward: EU and US defence spending as a share of GDP is 18% and 10% below its 20-year norm, respectively, but is on the increase.
Japan, for its part, is debating amending its pacifist constitution, which would enable it to increase defence expenditure beyond 1% of GDP, and in China defence spending is increasing by around 10%. Meanwhile, Russian defence spending is up nearly 50% as a proportion of GDP since 2011 and double that of NATO.
“The post-Cold War political order is being challenged, resulting in increased political tensions and potentially increased defence spending,” the financial services group said.
Credit Suisse also argues that US – but also European – defence stocks could act as a hedge in the event of a Donald Trump victory in the upcoming US presidential election.
Trump has said he would increase defence spending by 15% (compared to Obama’s 2017 budget).
Moreover, Trump has suggested that US support for NATO members would be conditional upon them raising defence spending to 2% of GDP — only Greece, Poland, Estonia and the UK meet this requirement currently.
“We highlight the close correlation between the relative performance of defence stocks and Trump’s popularity levels in polls,” Credit Suisse said.
In addition, increasingly signs of an easing in fiscal policy globally could lead to a higher focus on physical and social infrastructure, which could benefit defence stocks, as they fulfill both criteria via technological improvements, Credit Suisse said.
The global financial firm also highlighted that some members of the European Commission have already called for a change in the European Investment Bank’s mandate to finance military infrastructure and the issuance of EU defence bonds to fund joint military projects.