The world is spending more on defence

During the high point for globalisation the democracies had allowed their military spending and their supply of weapons to be eroded. This is now reversing.

| 6 min read

The world has become a darker place, with wars in Ukraine and Gaza. There are tenser relations between the China-led bloc and the US-led bloc. US President Joe Biden and Donald Trump agree that China is a serious competitor and that the US needs to add to its military capabilities. Both sides in the world power tussle have turned to re-arming.

During the high point for globalisation in the early years of this century the democracies had allowed their military spending and their supply of weapons to be eroded, enjoying the fruits of peace. Today Nato is more serious about getting all its members up to at least 2% of GDP to be spent on defence, China is busily building the ships and planes needed to project power further, whilst Russia is on a war footing as it throws more ammunition and weaponry into the Ukraine conflict. Germany has committed to substantial increased spending as it strives to keep up with Ukraine’s demands for shells.

The Ukraine war has boosted Russian spending and forced Ukraine to spend way beyond the normal level for a country of that size. Ukraine’s spending is also boosted by the gift of military aid by allies, placing demands on their budgets. Ukraine’s allies are now having to increase their weapons expenditure both to send more to the Ukraine and to replace stocks used to send to the war zone. China’s figures may be understated, as there is plenty of evidence of substantial commitment to increasing national capacity and extending China’s influence in the South China Sea and beyond. The Middle East spends heavily on armaments all the time, with a new set of demands for the Gaza war and the Iranian proxy wars against Israel.

The balance of forces

The spending levels on defence, which gives some indication of capability, reminds us that the US is way out ahead in its commitment and firepower. If you look at numbers of active personnel employed in the military, the US with 1.3 million is surpassed by China with 2.2 million. (International Institute for Strategic Studies). If you add Russia’s forces to China’s and add European forces to those of the US there is more balance. If you look at the capacity to deliver force beyond home territory, the US is dominant. The US has 11 aircraft carriers and supporting task forces to China’s 2 and Russia’s one.

Technological advances also point governments to having to spend more to keep up with the developments of their possible enemies

At the same time as new and old tensions in the world generate demands for more weaponry, so technological advances also point governments to having to spend more to keep up with the developments of their possible enemies. The wars in Gaza and Ukraine allow arms makers to see and adapt their weapons to war use. The wars provide them with challenges to come up with new ways of countering weapons deployed, or new ways of penetrating the methods of defence being adopted.

So far, the main talking points have been hypersonic missiles, drones and anti-tank tactics. Countries are turning to adopting ever higher speeds of flight to limit the ability of defenders to see and respond to incoming missiles. They are ordering large numbers of cheaper slower drones to seek to overwhelm defences by numbers, and coming to see the vulnerability of the tank to some cheaper and hand-held weapons.

Investing in defence

There are mixed views about investing in defence companies. Some think it is wrong to be making money out of munitions, and worry that spending more on defence builds bigger aggressive military capabilities. Others see the need for the democracies to be able to protect themselves. They believe in the doctrine that if you want peace you need to be ready for war to act as a deterrent. There are rogue states and states that want to pursue their aims by military means as with Russia in Ukraine, so others need to be able to counter.

The MSCI World Aero and Defence index has had a poor last year. The substantial exposure to Boeing which has had a troubled time has diluted the performance of some of the defence shares in it. Many of the leading defence companies have strong order books and the ability to charge for the technology and skill they bring to bear. The market has rewarded them for these features and understands the momentum behind both more defence spending and in support of defence innovations.

The defence sector has a close relationship with the digital industry. Artificial Intelligence will change the way defence works as well. Defence industries are looking at more unmanned weapons systems, at faster and better collections of data and processing. They are helping the military gain greater visibility of the battlefield or the targets and finding new ways to deliver and direct force.

In past battles the fog of war has often descended requiring commanders to make decisions based on poor intelligence and faulty information about where the enemy is and in what numbers. Today there are many more ways of observing hostile forces and verifying targets before committing to action. Those companies that can best understand the lessons from the rise of the drone, the targeted missile and the hypersonic weapons will do well as the main countries hasten to adjust their arsenals to the new ideas about warfare.

Higher defence budgets are now important to all the main powers. In the democracies strengthening armaments is the policy of Democrat led US and Social Democrat Germany as well as favoured by centre right governments.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

The world is spending more on defence

Read this next

How to combat drawdown risk

See more Insights

More insights

Five investment trends defining the first half of 2024
By Rob Morgan
20 Jun 2024 | 12 min read
China’s central bank criticises Fed policy
By Charles Stanley
20 Jun 2024 | 16 min read
G7 backs Ukraine and tackles migration
By Charles Stanley
17 Jun 2024 | 6 min read
Wall Street continues record-beating run
By Garry White
Chief Investment Commentator
14 Jun 2024 | 12 min read