Last week, President Biden spoke at a NATO summit in Brussels. The main topic, of course, was Russia’s invasion of Ukraine.
Biden’s main objective was to rally U.S. allies to put pressure on Vladimir Putin to withdraw from Ukraine.
NATO is the North Atlantic Treaty Organization. It is the intergovernmental military alliance between the U.S., Canada, the United Kingdom, and 27 other countries, most of which are in Europe.
Its stated purpose is to “guarantee the freedom and security of its members through political and military means.”
And as President Biden noted in his State of the Union address earlier this month, the NATO alliance will protect NATO territories.
Ukraine is not currently a member of NATO. But it has made no secret of its intention to join. And it has been strategically working towards this aim for many years.
If Ukraine were a NATO member, the alliance would be obligated to defend it against Russia. That would potentially include military action.
Defense Budgets Increasing Globally
We don’t know whether there will be a lasting diplomatic solution to the conflict in Ukraine in the near future or not.
But we do know this…
All 30 NATO countries are watching the situation in Ukraine closely.
If war reaches any of the NATO territories, the conflict will escalate.
But even if it doesn’t, Russia’s actions have re-energized NATO. And many countries are increasing their defense equipment and technology spending.
So far, seven European countries have announced increases in their military budgets since the Russian invasion of Ukraine. These include Germany, Italy, Belgium, Romania, Poland, Norway, and Sweden.
The largest of them, Germany, announced a €100 billion ($110 billion) fund as part of its military spending expansion. This would more than double its defense spend.
It announced plans to buy 35 F-35A fighter jets. These jets were designed to integrate stealth technology and systems. And they are outfitted with nuclear capabilities.
Each F-35A costs about $110 million. And they are made in the U.S. by Lockheed Martin. Aerospace and defense technology company Northrop Grumman provides major components.
But European countries are not the only ones increasing their defense spend…
America Is Beefing Up Its Defense Budget
The U.S. is also strengthening its defense budget…
The Department of Defense faces financial and logistical decisions on multiple fronts.
The first is what to do about Russia’s invasion of Ukraine.
The second is concern about whether China could attack Taiwan in some similar fashion.
In addition, the U.S. military regularly carries out training and missions.
All of this has budget implications.
Russia’s invasion of Ukraine on February 24 intensified defense spending conversations.
When I was in Washington a couple of weeks ago, I met a staffer who works for a member of the Armed Services Committee. He told me there’s more focus on increasing spending than he has seen in a long time.
As you can see from the chart below, the U.S. defense budget actually dropped from 2011 to 2015.
But Russia invaded Crimea in 2014. And the size of the U.S. defense budget started to pick up after that.
These increases have been bipartisan ones – through the Obama, Trump, and now Biden, administrations.
Earlier this month, Congress approved $782 billion for defense spending for fiscal year 2022. This is an increase of 6% on the 2021 figure. And it’s roughly 3.4% of GDP.
The defense budget could increase even further in 2023 and beyond…
The vice chair of the House Armed Services Committee recently said it needs to rise to 5% of GDP – over $1.1 trillion – in the years to come.
And there’s one key area into which this funding is going to flow…
Bipartisan Push for Defense Technology
The bipartisan Future of Defense Task Force was created two years ago under the Trump administration. It was established to analyze U.S. defense assets and capabilities.
It was co-chaired by Seth Moulton (D-Mass.), a retired marine and member of the House Armed Services Committee, and Jim Banks (R-Ind.). And it included Representatives from both sides of the aisle.
The Task Force initially reported its findings in September 2020. Two weeks ago, Moulton and Banks reported before Congress on progress under the key areas identified by the task force.
Their report stressed the need for global defense technology alliances.
In an interview that followed, Moulton underscored the importance of such alliances in Ukraine.
He used the example of Turkey. Turkey sent armed drones to Ukraine. Those were used to target Russian tanks and disable Russian rocket launch systems.
Moulton is pushing for upgrading weapons and equipment. He thinks older equipment could compromise national security. He believes technology-based alliances would also serve well in deterrence against China.
And he said, “The U.S. should reach out to the countries that lead the way in innovative technology and establish the norms for its use.”
This would pave the way for more U.S. defense sales to its allies.
From an investment perspective, it means more money flowing into the defense technology arena.
A Simple Way to Profit
Technology is at the center of modern military weaponry. So any increase in defense spending would spell opportunity for defense technology companies.
That’s why this opportunity falls under my Transformative Technology investing theme.
That’s one of five investment themes that arose because of the distortion between the markets and the real economy. Those themes are New Energy, Infrastructure, Transformative Technology, Meta-Reality and New Money. (For a more detailed breakdown of my five investment themes, just click here.)
To position yourself for gains, I recommend buying the iShares U.S. Aerospace & Defense ETF (ITA).
It holds 35 stocks in the aerospace and defense sector. Some of its main holdings are defense giants, Raytheon (RTX), Lockheed Martin (LMT), Boeing (BA), and Northrop Grumman (NOC).
ITA has risen by 10% since Russia invaded Ukraine. But we expect more upside due to ongoing geopolitical tensions and NATO conversations.
Regards,
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Nomi Prins
Editor, Inside Wall Street with Nomi Prins
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