To extend Benjamin Franklin’s immortal words, nothing can be said to be certain except death, taxes, and war. In this vein it comes as no surprise that The International Institute for Strategic Studies (IISS) announced this week that worldwide defence spending rose 1.7% in 2014, the first annual rise since 2010.
IISS notes that “insecurity, violence and the use of military force are all increasing,” adding that “the ‘arc of instability’ is widening, and military crises do not seem to end, but rather multiply.” It went on to say that some non-combat-related missions, from co-ordinating pandemic response through to providing disaster relief, also require the widescale deployment of armed forces in often complex situations.
This recent ramping up in arms buying is being driven by surging demand from Asia, the Middle East and Africa, IISS noted, and is a reflection of growing instability in these regions, from the march of Islamic militants Islamic State across Syria and Iraq, through to growing threat of Boko Haram in Nigeria.
News of increasing market demand will come as music to the ears of BAE Systems (LSE: BA), which is already enjoying terrific order levels from such geographies — around a third of all new orders during January–August came from non-Western clients. Not surprisingly the company is pulling out all the stops to latch onto these promising new territories, from restructuring its businesses in Saudi Arabia last year, through to setting up a base in India.
Western spend set to rise?
Of course, a backcloth of suffocating budgetary pressures means that defence expenditure from US and European nations has taken a huge hit in recent years. Pentagon spending now accounts for 38% of the global total, down from 47% just four years ago, IISS comments, even though its total outlay of $581bn last year dwarfed second-placed China, which spent just $129.4bn.
Still, the governments of the West remain key players in the combatting and resolution of many of the world’s military crises, and with the sheer number and scale of these conflicts on the rise the US and Europe are likely to have to lift spending again to maintain the long-term effectiveness of their armies in a changing world.
In particular, IISS points to a challenge to the post-Cold War impasse since the Ukraine crisis broke last year, a situation that will require NATO to plug gaps in its military capability.
Revenues primed for take off
On top of this, the IISS report also underlines the vast importance of military aerospace programmes across the globe, which will lead to rejoicing at plane builders such as Cobham (LSE: COB), Senior (LSE: SNR), Meggitt (LSE: MGGT), and of course BAE Systems.
The IISS notes that
“air power remains a strategic asset with the US and Russia continuing next-generation bomber projects,” adding that “the US is examining future concepts of combat aircraft to succeed the current fifth-generation programmes, while the US, Russia, China and others are [also] considering the optimum mix of manned and unmanned aircraft that will constitute future force structures.”
Given all of these supportive factors, I believe that the world’s weapon builders can expect revenues to step higher once again, after many years of top-line pressure.
