At the same time, America and China are engaged in a behind the scenes battle in the China Sea regarding Taiwan. A source of tension between the two world powers that has intensified in recent months due to the war in Ukraine. Currently, the country that allocates the most money to defense in the world is United States with 782,000 million euros in one yearIt is followed by China, Russia, United Kingdom, Germany, India, Japan, South Korea, Saudi Arabia and Australia.
“China is increasing its war spending and I know that in 10-15 years it will be a number one military power and America modernized its military system, Similarly, if Republicans win the next US presidential election, military spending will increase even more because we all know that this budget is more in the background when Democrats are in the White House, while Republicans have much more stake on these issues. Let’s apply ”, commented Rafael Ojeda, global macro analyst at Fortage Funds.
In its annual report, NATO calculates that the total investment in defense in 2022 was $1,052 trillionOf which 329.626 million came from European allies and Canada. These states invested 1.65% of their GDP in military spending in 2022, a slight bump from the previous year’s 1.67%, but also increased their war budgets for the eighth consecutive year, up from 2. increased by .2% in real terms between 2021 and 2022. Notably, only seven NATO countries, Greece, the United States, Lithuania, Poland, the United Kingdom, Estonia, and Latvia, complied with the agreement to increase military spending to 2% of GDP. 2022.
At the next NATO summit in Vilnius (Lithuania) on July 11 and 12, the US will ask its European partners to do more in their forces after the 2022 breach and the lack of weapons that Ukraine is facing on the battlefield . , Finland officially became a member of the Atlantic Alliance on 4 April, and the accession also meant modernization of its military in terms of equipment, investment in infrastructure, and recruiting more troops.
“The defense sector in Europe has become one of the largest in the world. Currently Russia, France, Germany, the United Kingdom and Italy are among the largest defense spenders in the world and there is no need for this level of spending to stay at what it has been for Expectedly not, because as per various calculations, it could register a compound annual growth rate (CAGR) of over 3% during the period 2020-2025, explains iBroker analyst Antonio Castello.
A possible economic downturn could reduce or halt military spending in European countries, but analysts say a peace deal between Russia and Ukraine will slow investment in arms as mistrust and hostilities could persist despite a ceasefire. Is. “The Federal Reserve and the European Central Bank (ECB) have shown that they are not going to abandon the economies, but a recession will be a risk for these types of companies. If peace comes, military spending will not be cut at the root”, Ojeda argues.
war as a catalyst
“The defense sector in Europe is at an all-time high, has managed to surpass the previous high it hit just before the Covid-19 collapse and is up 20% so far this year. Unfortunately, given the current situation, it remains a very interesting sector and it is possible that it will remain so for some time,” says Javier Lorenzo, manager of the GPM Asignacion Táctica Fund.
“Many times when something goes up a lot, small investors think it is expensive or it cannot go much higher. The reality is that when something has good momentum it shows strength and hence it can continue to grow as long as the investor confidence is maintained. Values like Thales, Leonardo or BAE Systems are breaking higher and at the moment they are good choices in your portfolio”, he added.
Only eight of the 20 largest listed companies in the sector currently have a growth potential of 10%. Action that analysts agree on reuters What gives it a greater run on the stock market twelve months ahead is American Leidos with 23%, which has interests in various businesses such as defence, aviation, technology and biomedical research, followed by American L3Harris Technologies with 22%. , with General Dynamics 17.10% and Huntington Ingalls Industries 15.60%.
Valuation wise, the sector isn’t trading particularly cheap except for Italian Leonardo, which trades at 7.18 times earnings (per ratio), Indra at 14.32 times earnings and US Huntington Ingalls Industries at 14.68 times. Arms stock doesn’t particularly stand out when it comes to dividend distributions and only eight companies have a dividend yield of more than 2%. British BAE Systems is the most generous listed company with shareholder remuneration with a dividend of 2.63%, followed by Lockheed Martin with 2.31%.
“Almost the entire sector is trading at maximum area. It is also true that the defense sector is important to many of these companies, but not all of their businesses are fueled by it. For example, Rheinmetall earns about three-fifths of its revenue from the defense business – weapons, ammunition and vehicles such as the all-new Leonard main battle tank. But the rest of its business is focused on the automobile sector, especially with regard to diesel engines … something about which the market is not at all enthusiastic”, emphasizes Antonio Castello.
“This puts consensus price targets not particularly far from current prices. This is a consistency we see across practically all companies in this sector. They trade at a relatively narrow discount to the theoretical prices set by analysts.” Although they have improved, it’s not that we’ve seen them grow like it seems they should have,” Castello says.
Cyber Security, An Upward Trend
Ukraine and Russia are not just fighting in the streets and in the trenches as they did in World War I. The wars of the 21st century are being fought on all fronts, through propaganda and on the Internet, which is why cyber security companies are becoming increasingly important. A megatrend that goes beyond the economic cycle and the conflict in Eastern Europe as large companies try to protect themselves from hackers and criminal organizations attacking what is most precious today: consumer data, ‘big data’ and more sensitive corporate information Are.
Cyber security has become a high-profile requirement, important for governments, official bodies, large corporations, and small and medium-sized businesses. According to a report by the consulting firm McKinsey, some estimates suggest that the cost of protecting oneself from global cybercrime will increase by 15% per year over the next few years, from $3 trillion in 2015 to an estimated $10.5 trillion by 2025. ,
“Globally, it is North American companies that lead the way: Palo Alto Networks, Fortinet, Cisco… they are the most famous, The first, Palo Alto, is probably the best analyst recommendation. It is growing rapidly in this area thanks to its innovative, next-generation security platforms, which allow it to simplify its customers’ security infrastructure by eliminating the need for multiple security tools and independent software products,” Castello says.
Palo Alto has made strategic acquisitions to fuel its growth in recent years and is acquiring companies such as Cider Security – a leader in application security and software supply chain security -, BridgeCrew, Prisma Cloud – Prisma Cloud – in the cloud The first security platform to provide security. Applications Lifecycle-, Crypsis Group, Lite Cyber, Morta Security and Cyvera. Despite this aggressive buying policy, it has a strong balance sheet with $3,350 million in net cash as of January 31, so it can continue to make strategic acquisitions in the coming years.
“Here, in Europe, there are also good companies, such as the British Darktrace, but it is one of the few listed, as most are subsidiaries of other large corporations – such as Stormshield, which is owned by Airbus – or simply they No quotes”, sentence.