Future of Defence ETF Monthly Report | January

30 January 2024

Defence ETF Key Takeaways | January

NATO increases military budget by 12% to 2.03 billion euros – NATO announced at its meeting of the North Atlantic Council on December 13, 2023, it was increasing its military budget for 2024 by 12% to 2.03 billion euros and its civil budget by 18.2% to 438.1 million euros. NATO Deputy Secretary General Mircea Geoană highlighted that increasing and broadening the use of NATO common funding allows Allies to more effectively address shared security challenges. “Common funding demonstrates Allied solidarity and collective will. In turbulent times, we need this more than ever,” he said. 

Sweden on path for NATO membership approval – The Turkish parliament’s foreign affairs committee gave its consent for Sweden to join NATO, paving the way for a full parliament vote and ratification of Sweden as NATO’s 32nd member.  Once its application is approved, Sweden is expected to make a substantial military contribution to NATO, especially across air and sea domains.  After announcing a defence spending increase of SEK 27 billion ($2.4 billion USD) from 2023 to 2024 — a rise of 28%— Sweden expects to hit NATO’s two percent GDP spending target next year. Stockholm has doubled military spending since 2022, with a total of just under SEK 120 billion ($10.8 billion USD) made available for 2024. 

Record high European defence spending – European defence spending has been boosted to record levels by procurement of new equipment.  At a record €240 billion, European defence spending again increased by 6% on the previous year, marking the eighth year of consecutive growth. 20 of the 27 EU Member States increased defence expenditure, with six increasing spending by over 10%. Sweden (+30.1%), Luxembourg (+27.9%), Lithuania (27.6%), Spain (19.3%), Belgium (14.8%) and Greece (13.3%) recorded the highest increases in overall expenditure among the EU 27. (European Defence Agency)

Defence shares continue to outperform amid heightened geopolitical risks – Shares of weapons makers have outperformed since the October 7th attack in Israel.  The wars in Gaza and Ukraine have created a dilemma for ESG investors as defence stocks have rallied as conflicts have escalated and geopolitical risks have risen.   Executives of some military contractors signalled to shareholders on their recent earnings calls that the war in Gaza could increase sales of weapons. General Dynamics Chief Financial Officer Jason Aiken said the company has already experienced increased demand for artillery since the onset of Russia’s war in Ukraine.  (WSJ)EU defence spending is expected to reach a record 270 billion euros in 2023, an increase of 12.5% over last year’s 240 billion euro spend, with 27 of the EU’s members ratcheting up military spending. The European Defence Agency said six countries had increased their spending by over 10%, with NATO new applicant Sweden targeting over 30% more. Sweden’s application is expected to be approved by year end and NATO’s newest member Finland, is on track to spend 2.3% of GDP this year.  But EU spending in aggregate remains at 1.5% of GDP, still below the NATO 2% target.  

 

 

Sources available upon request. Please remember that when you invest in ETFs, your capital is at risk.

Macro Outlook

NATO announced it was increasing its military budget in 2024 by 12% to 2.03 billion euros and increasing its civil budget by 18.2% to 438 million euros. The heightened risk environment created by conflicts in Ukraine and Israel have necessitated an increase in NATO spending and better overall cooperation. 

After last summer’s approval of Finland as NATO’s 31st member, Sweden is on track for membership approval as NATO’s 32nd member country. Already ahead of its approval, Sweden has increased its defence spending 28%, on target to meet the 2% GDP spending goal. But Sweden is not the only European country spending on defence, with Luxembourg, Lithuania, Spain, Belgium, and Greece also on track for record spending increases.  

All of this has sent defence and cyber defence names soaring this year, outperforming the overall market. This creates a dilemma for ESG investors screening on factors such as controversial weapons. The EQM Future of Defence Index employs a softer screening approach tied to compliance with UNGC and OECD principles, allowing ESG-aligned investment without eliminating many of the large defence contractors benefiting from the current heightened spending environment.  

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