Defence Tech Trade
A thematic idea for 2025 & second order Trump trade
While some are questioning whether the original Trump trades have now run their course (we’re not convinced they have), we’re seeing a lot of chatter starting on what some second-order Trump trades could be for 2025.
At least in the short term, some trades are starting to look a little stretched. For example, we took profit yesterday on our BTC longs as the coin nears $100k, a trade we spoke about in detail here and one we initiated off the back of the article.
Today, we wanted to run through one of our favourite second-wave ideas, namely defence tech.
What is Defence Tech?
When we’re talking about defence tech (spelt using a ‘c’, not a ‘s’ for our U.S. friends), we’re referring to the development and application of advanced tech solutions relating to national security and military capabilities.
This encompasses a wide range of areas, including artificial intelligence (AI), cybersecurity, autonomous systems, advanced weaponry, and surveillance systems.
This niche within general defence is becoming increasingly important due to the growing complexity of modern conflicts, which often involve cyber warfare, drones, and other similar elements.
Why is it going to get more important?
The world is becoming an increasingly dangerous place. Rising geopolitical tensions mean that the U.S. and other Governments need to maintain a strategic edge against potential adversaries by investing in cutting-edge innovations. These technologies not only provide military advantages but also help safeguard critical infrastructure and deter external threats, emphasising their role in ensuring global stability and security.
As we’ve already seen with Russia/Ukraine, warfare is shifting in its nature, with tech playing a more crucial role in how information (and subsequent action) is being transmitted.
With AI making considerable strides in the past year, it was/is only a matter of time before this translates into the defence sector.
Taking The Lead From The U.S.
As investors, we specifically want to focus on trade ideas that stem from the actions of the US. This is for three main reasons
Defence Spending
The below graphic summarises the first reason very well:
Last year, U.S. defence spending dwarfed that of any other nation. Yet the U.S. isn’t at war right now, it’s simply that the size of GDP means that with a 3.4% spend on defence, it comes out to $916bn. This makes it a key market for any private company in this sector, as the contracts given out can make or break a business to an extent that simply isn’t on the same scale as other nations on the list.
Depleting Stockpiles
Admiral Samuel Paparo, commander of the U.S. Indo-Pacific Command, had a speech at the Brookings Institution earlier this week, where he confirmed that U.S. stockpiles were getting run down from the supply to other nations, such as Ukraine and Israel.
He noted that:
"With some of the Patriots that have been employed, some of the air-to-air missiles that have been employed, it's now eating into stocks, and to say otherwise would be dishonest."
"Inherently, it imposes costs on the readiness of America to respond in the Indo-Pacific region, which is the most stressing theatre for the quantity and quality of munitions, because the PRC is the most capable potential adversary in the world”
Therefore, we’re likely going to see a large spend in the coming couple of years to get these stock levels back higher. Yet this won’t all be with the current range of products. Rather, we feel that a good portion of this could be allocated to more defence tech ideas, benefitting the companies behind it.
Top Trumps
President-elect Trump might cite that he wants to get a solution quickly with Ukraine/Russia, but this doesn’t mean that defence spending for new areas is going to slim down at all. Rather, it could rise.
Trump wants to cut down on unnecessary spending in some areas. It’s true that defence spending on some legacy features could get cut. But spending on new defence tech is (in our view) only going to increase. Funds will either be diverted from one area to defence tech, or the review will flag up how much more efficient allocation to this area can be for the overall budget.
In fact, the administration has already emphasised the need to prioritise cybersecurity, space defence, and advanced technologies over traditional military expenditures. That’s why we mark this down as a Trump trade.
For the rest of the article, we discuss specific trade ideas for this theme. You can manage your account here to access this full article and all other research.
Trade Ideas
So, we’ve established the case for a larger demand in defence tech. But who could be the main benefactors?