Investing in military tech--Make your portfolio more defensnsive

4 thg 1, 2020

The rise of populism is not necessarily something investors will relish politically, but it nevertheless brings opportunities for the adventurous. 

By and large, populist leaders the world over like to spend more government money and they’re especially keen to spend taxpayers’ money on defence and state security. Like it or loathe it, it’s a trend clearly visible in countries as diverse as China, Poland and the US.

It is because of those populists that more liberal Europe is now having to spend more money on its Nato commitments — even relatively peace-loving Germany says it intends to get to 2 per cent of GDP levels in the not too distant future, though I wouldn’t hold my breath on that.

But there’s another big trend at work — how the disruptive technology sector is being sucked into the military industrial complex.

Giants such as Google may encounter internal resistance to getting involved in defence and security (it dropped out of Project Maven because of employee unrest) but the likes of Amazon and Microsoft have no such inhibitions. In fact, the two companies recently battled it out on a mammoth 10bn US defence contract called Project Jedi, which Microsoft won (not without controversy).

Insiders suggest Amazon is now increasing its commitment to defence and security technologies, chasing upstarts such as Palantir Technologies and Anduril (clearly Lord of the Rings fans founded both businesses) who have dominated this space until now.

The Americans are simply reacting to the obvious signals coming out of China, where big tech is being actively co-opted into a new high-tech defence and AI-enabled state security apparatus. The Chinese certainly seem to be ahead, but for investment purposes, it’s all but impossible for UK investors to find a way of playing this trend. 

However, the US could respond by rekindling its love affair with the Defense Advanced Research Projects Agency (Darpa), which has produced civilian by-products ranging from the first computer mouse to GPS navigation. Now there’s even talk in the press that UK government strategist Dominic Cummings wants to set up a Darpa equivalent in the UK.

For investors, this determination to upgrade both external and internal defences has resulted in a bonanza for shareholders. The table below shows returns for the broad defence and aerospace sector in the US market against those for the wider index and also tech-specific stocks.

As you can see, military stocks have nearly kept up with the fastest growing (software dominated) bit of the tech space, leaving returns for tech hardware and mainstream US stocks way behind.

The case for defence
Index-------------------------------------------------------5 year annualised return
S&P 500 Defence & Aerospace Index-------------------------17.54%
S&P 500 Technology Select Sector Indeex-------------------17.82%
S&P 500 Technology Hardware Select Sector Index-------- 7.55%
S&P 500 index----------------------------------------------------10.98%


XAR on the NYSE, that follows the big participants in this sector. It rose by a cracking 38 per cent in 2019 (the S&P 500 by contrast is up 29 per cent over the same period). Large companies such as Raytheon, United Technologies Corporation and Northrop Grumman are all pushing towards all-time highs.


Again, whether you like it or not, more money will be spent on police technologies, general surveillance and border security. That money will increasingly find its way into companies with a strong technology focus (as opposed to a more engineering-led platform approach pioneered by the military procurement giants).