Russian "volunteers" on Ukrainian soil. Bad news for the world, but good news for the defense industries (Photo: Reuters)
It is not certain how well the brokers and investment houses involved in Wall Street trading are proficient in the Babylonian Talmud. In any case, if there are any, they would certainly have an advantage over their competitors, especially if they memorized the line according to which the beginning of redemption passes through war ("War Nami Ethlata Dagaula is", Tractate Megillah 24:2022) – and even more so, if they remembered that on the way to the first there are also those who benefit from the second: manufacturers and suppliers of defense products, mainly the American ones.
Russia's war against Ukraine, for example, which broke out on February 3, 7, led to a 2.2% increase in the global aggregate defense budget that year, which stood at about $877.40 billion, an all-time high. This is according to a report by the Stockholm Institute for Peace Research.
The highest defense budget was that of the United States, which stood at $3 billion last year and constituted about 5% of the global defense budget and 292.13% of the US GDP for that year.
Next is China, with a defense budget of about $1 billion, constituting about 6% of the global defense budget and 86.4% of its gross national product, and the third largest budget belongs to Russia, at about $1 billion and constituted about 44.2022% of its gross national product.
Ukraine's defense budget, by comparison, was about half of Russia's defense budget and stood at $33 billion in 5, accounting for about 47.<>% of its GDP for that year.
It is therefore no wonder that Ukraine is crying out for military and economic help in dealing with the Russian bear, and according to the US Foreign Relations Committee (CFR), it has received $<> billion in ammunition assistance from the Americans since the outbreak of the war with Russia, provided mainly by American defense companies.
In this context, attention should also be paid to the rapid growth in defense exports from Israel, since even countries that were considered to have low defense budgets such as the Netherlands, Germany and the Scandinavian countries, or – on the other side of the world – Korea and Japan, have greatly increased their defense spending, and the Israeli defense industry is certainly benefiting from this increase.
Shares of giant defense companies in the US (Photo: Walla!, None)
Back to what is happening overseas: Shares of the five largest defense manufacturers traded on the New York Stock Exchange have risen by an average of 8.5% since the outbreak of the Russia-Ukraine war (see table) – a relatively impressive figure considering that this is an activity whose results are evident in the long term.
The company whose share price rose the most was that of Lockheed Martin, which specializes in the aerial military field, which jumped about 18%, followed immediately by the share price of Northrop Grumman, a defense concern specializing in, among other things, aircraft carriers.
The weakest performing stock was General Dynamics, which fell about 16.2%. General Dynamics is the fifth largest defense conglomerate in the world, and the U.S. government is its main customer, to which about two-thirds of its sales are directed.
Is growth directly related to the Russia-Ukraine war? And how does Donald Trump's tenure in the White House relate to rising defense budgets?
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Former US President Donald Trump. His decision to cut US aid to NATO has led European countries to increase their defense budgets, especially in the face of Russian aggression.
From defensive to attack
Sergei Vaschunok, senior analyst at Oppenheimer Investment House, explains: "The pricing of the sector's shares today actually lost slightly from the level it received with the outbreak of the Ukraine-Russia war, due to discussions on the debt ceiling in the US. The absence of a debt ceiling threatens the American nation's budget (which has since been resolved) in general and the defense budget in particular.
The surge in stocks is not routine since these are companies that are considered defensive, that is, acquired during crises as part of protecting the investment portfolio, and which grow relatively slowly. This is because they deliver orders after years and therefore have a huge backlog of tens of billions of dollars ahead.
Lockheed Martin, for example, doesn't even see the result of the defense budget increases in its forecasts for 2024. On the other hand, there is no doubt that growth will accelerate in the coming years due to increased global defense budgeting.
The strongest impact on companies is defense budgets around the world, with most companies operating within their own framework, and American companies being mainly the ones that sell big all over the world, and also enjoy the largest share of the defense budget at home.
The Russia-Ukraine war has thrown many countries under the notion that budgets need to be increased, but that happened even earlier, when Trump told NATO countries that there was no way the U.S. would continue to fund the North Atlantic alliance on its own, and that the countries should participate.
In this respect, European countries, with the possible exception of England and France, were underinvested in the field of defense, and with the outbreak of the war began to equip themselves. But even in this respect, it should be noted that Europe is dealing with things that are still higher on the continent's agenda, such as investments for energy independence.
So the defense sector in Europe may not have grown too much, but there is no doubt that the continent has increased the global aggregate budget.
The American companies in the table are actually defense giants that have arms in almost every military and security field, and each has its advantages and disadvantages."
Sergei Vaschunok, senior analyst at Oppenheimer Investment House (Photo: PR)
Flying the stocks
Vaschunok also explains the huge jump in Lockheed Martin shares: "The jump in Lockheed Martin's share price is related, among other things, to its being the manufacturer of the F-35, which is considered the most advanced aircraft in the world today, and among the most expensive – if not the most expensive, – and the United States, along with countries that received its approval (including Israel), have begun to acquire them, and according to reports, about 900 of these planes have been manufactured so far.
Northrop, whose stock posted the second-highest jump on the chart, is considered a leader in the production of aircraft carriers and destroyers, which the U.S. is also arming itself with as part of its preparation for the threat from China, which is leading to a rise in the stock.
Regarding the decline in the stock of General Dynamics, which manufactures tanks and is also known from the F-16 aircraft, it is attributed to the acquisition of the F35 alongside problems in the company's management that affected its cash balance.
In general, it should be understood that not many new companies are being created in the field of security, apart from various suppliers, and that this is a field with very high barriers to entry. This is also one of the reasons that the field has always been characterized by consolidation, which only reduces the number of companies in the field, such as the merger of Lockheed and Martin.
These connections have created the same security monsters shown in the table, which are in a strong position of power even vis-à-vis governments. After the decline in stocks as a result of uncertainty regarding the US debt ceiling, companies declined and are currently trading around an average multiple of 16-17, who is more and who is less, and since then have begun to recover upward. Therefore, some of them may be a buying opportunity."
- World money
- Defense budget
- Donald Trump
- Lockheed Martin