Geopolitical risks boost defence investment potential

Rising geopolitical tensions have made national security a top spending priority for governments around the world, supporting defence as a resilient long-term investment theme, says Nick With-Seidelin, associate portfolio manager, CIBC Asset Management.

“Historically, defence spending has averaged roughly 1% of GDP on a global basis,” he said in a March 6 interview. “Throughout 2030, this is expected to accelerate to more than four times that historical growth rate, leading to more than $150 billion of annual incremental spend, primarily driven by NATO countries.”

Listen to the full conversation on the Advisor To Go podcast, powered by CIBC Asset Management.

Canada is on the cusp of a defence revitalization, with government planning to spend 5% of GDP on defence and related infrastructure, up from 1.4% in 2024, he said. Canada may also pursue technology transfer deals, like the rumoured Bombardier-Saab fighter jet collaboration.

“Agreements of this nature would allow Canada to participate in and receive economic benefit from projects that the country does not currently have the capacity to take on independently,” he said.

Compared to other countries, the U.S. defence sector is more mature and has limited fiscal capacity, with the country’s deficit near 8% of GDP, he said.

“Recent announcements from President Trump on potential capital allocation restrictions also gives us pause on the potential for successful stock picking within the U.S. defence sector.”

Still, U.S. companies like SpaceX, Palantir Technologies, and Anduril Industries could take share from legacy primes with superior technology and speed, he said.

Europe offers significant opportunity, With-Seidelin said, as the Ukraine conflict has made defence spending a core national priority rather than a discretionary choice.

Europe’s ammunition inventory currently sits at just two or three days, far below NATO’s 30-day standard, he said. This presents an opportunity for Europe to prepare and invest in its military.

And the EU recently eased ESG restrictions, allowing defence companies to qualify for ESG benchmarks. “We believe that this could unlock significant capital flow into European defence companies,” he said.

Japan has historically capped defence spending at 1% of GDP, but this figure could now reach 3% to 3.5% over time, With-Seidelin said.

“Due to Japan’s proximity to Russia, North Korea, Taiwan and China, we believe the country will continue to gradually ramp up spending,” he said. “We also acknowledge certain fiscal constraints could limit growth, particularly social security costs, as the country’s population continues to age at a rapid pace.”

Opportunities

One company With-Seidelin likes is CAE Inc., an aerospace company that specializes in flight simulation and training services, which is a critical component of military spending. The company generates roughly 45% of total revenue from defence clients, he said. 

“We estimate that if CAE is able to capture just 50 to 100 basis points of net new defence spend on an annual basis, they can likely double the size of their defence business within the next few years.”

BRP Inc. is another company With-Seidelin expects to benefit from defence spending. BRP could gain from supplying Arctic snowmobiles to the Canadian military, he said, and from growing demand for drone engines.

Within the engineering and construction sector, he likes AtkinsRéalis [formerly SNC-Lavalin], Stantec and WSP Global.

“Projects covering shipyard optimization, seaport and dry dock construction and military base revitalization across various geographies are considered opportunities for these firms,” With-Seidelin said.  

Unmanned assets, like drones and missiles, will be another key area of defence spending moving forward. Up to 70,000 low-earth-orbit satellites are expected to launch over the next five years, he said. This will drive 22% annual growth in the satellite industry, and support defence uses such as surveillance, imagery, secure communications and border monitoring.

“Among the most important factors is the scope of the opportunity,” he said. “As space continues to emerge as a critical domain, we expect investment to extend far beyond traditional military hardware.”

This article is part of the Advisor To Go program, sponsored by CIBC Asset Management. The article was written without input from the sponsor.