In the Spotlight Trends of the Month
Geopolitical risk is a hot topic right now. With several wars taking place around the world at the moment, and tension growing between some very powerful countries, many investors are wondering how to position their portfolios. Accordingly, the defence industry may be one of the sectors that it may worth having a look at. This sector has performed well historically during periods of geopolitical uncertainty, and it may have the potential for solid growth in the years ahead.
A multi-trillion dollar industry
The defence sector encompasses a range of industries focused on the development of products designed to help countries to protect themselves. A multi-trillion dollar market, it includes aircraft production (including drones), ship and submarine building, weapons manufacturing, cybersecurity, space satellite technology, and more.
Vital to national security, the sector plays a crucial role in economic growth and technological advancement. Often, technological breakthroughs in the industry have broader applications in civilian industries.
Defence budgets are rising
In recent years, defence budgets have risen significantly, particularly in the US, which is responsible for a large chunk of global defence spending.
In 2023, the US defence budget totalled $820 billion, up from $682 billion five years earlier.
Looking ahead, government spending on defence is likely to remain high.
In the US, a Trump administration should be good for the industry as Republican leadership has historically favoured stronger military budgets. And Donald Trump is known for his strong stance on defence. The last time he was president, he ramped up US defence budgets significantly (so the defence sector could be a good “Trump trade”). Europe is where things look really interesting, however. According to McKinsey & Company, European defence budgets are expected to increase by a cumulative €700 billion to €800 billion between 2022 and 2028 as European countries restock their defence inventories, which are worryingly low after 30 years of under-investment.
Escalating geopolitical tensions
It’s easy to see why defence is a priority for countries today. For over a year now, there has been a war in the Middle East. This conflict — which has had devastating consequences for the region — continually threatens to escalate into a wider regional conflict. It’s a similar story with the war between Russia and Ukraine. This war — which came back into focus in November after Russian President Vladimir Putin lowered the threshold for a nuclear strike — has been going on for over 1,000 days now, and the potential for wider involvement in the region remains a concern.
Adding further complexity to the geopolitical landscape is the tension between China and Taiwan. This stems from China's claim that Taiwan (a major chip manufacturer) is part of its territory. It’s worth noting that a recent report in The Financial Times said that Taiwan — which has relied on the US for protection in the past — is looking to buy a US weapons package worth more than $15 billion to show that it is serious about defending itself. This package would include 60 F-35 fighter jets, four Advanced Hawkeyes, 10 retired warships, and 400 Patriot missiles.
On top of all this, there’s growing tension between the US and China as the two countries are competing for global economic dominance. Today, these countries are engaged in a technological rivalry, particularly in areas such as artificial intelligence, 5G, and semiconductors. So overall, there’s a lot of geopolitical uncertainty at present. This means that governments cannot afford to ignore defence spending.
It’s worth pointing out that political changes can impact government defence budgets, creating volatility within the sector at times. However, the current climate of heightened geopolitical risks suggests that the demand for advanced defence capabilities will most likely remain resilient in the years ahead.
New technologies & the defence industry
Over the last few decades, the defence industry has undergone rapid changes as technology has advanced. And while governments today still spend a substantial amount of money on old-school defence products such as fighter jets, battleships, and submarines, more funding is going towards new technologies. Examples here include:
Drones — Drones, or unmanned aerial vehicles (UAVs) as they are also known, are playing an increasingly important role in the defence world as they can be used for surveillance, intelligence gathering, tactical strikes, and more.
Cybersecurity — Given the rise of cyber warfare, countries are increasingly investing in sophisticated cybersecurity solutions to protect their critical infrastructure.
Space technology — Space tech has many applications in the defence world including satellite surveillance, missile defence systems, and space-based weapons.
Data analytics — Defence agencies are increasingly turning to data analytics companies such as Palantir and Snowflake to apply artificial intelligence to their data and enhance their decision-making processes.
Gaining exposure to the defence sector
On eToro, there are several Smart Portfolios that provide exposure to the defence sector. An example is DroneTech, which focuses on drone technology and provides access to defence stocks such as those of Lockheed Martin, Raytheon Technologies, and Northrop Grumman. Other examples include CyberSecurity, which is focused on cybersecurity stocks, and SpaceTech, which is focused on companies leading the space revolution.
November was one of the best months in history for cryptoassets.
Boosted by Donald Trump’s victory in the US election, Bitcoin shot up from around $70,000 to near $99,000.
Looking ahead, the landscape for crypto appears to be promising. This is because the Trump factor is not the only force driving digital assets higher right now.
A Trump trade
There’s no doubt that the US election result has instilled optimism into the crypto markets. Formerly a crypto critic, Donald Trump has changed his views on Bitcoin and made it clear that he now supports the asset class. Not only has he promised to promote crypto mining in the US, but he has also vowed to create a national crypto stockpile by holding Bitcoin seized by federal law enforcement agencies. In addition, Securities and Exchange Commission (SEC) Chair Gary Gensler — a notorious crypto sceptic — has said that he will stand down when Trump is inaugurated. A leadership change in the SEC could lead to clearer regulatory frameworks for the asset class, making it easier for institutions to invest confidently in digital assets.
Bitcoin ETFs are a game-changer
But, Donald Trump’s view on Bitcoin is only one of a myriad of factors influencing its trajectory at present. Another key factor is the availability of Bitcoin ETFs. These funds — approved by the SEC in early 2024 — have been a game-changer for the crypto industry as they have brought together the traditional financial world and the digital asset world. Previously, investing in Bitcoin was challenging for traditional investors as it involved setting up a separate investment account with a crypto exchange and establishing a digital wallet. And wealth managers couldn’t help their clients as crypto products were unregulated. Now that there are Bitcoin ETFs, however, it’s a different story. All of a sudden, there are regulated products available and wealth managers can put their clients into Bitcoin within their existing investment accounts in minutes.
New regulatory frameworks
New regulatory frameworks are also playing a key role in supporting crypto. Take Europe’s Markets in Crypto-Assets (MiCA) regulation, for example. This is designed to protect investors and preserve financial stability, while simultaneously fostering innovation and promoting the attractiveness of the digital assets sector. This type of regulation is leading to far more acceptance of digital assets as a legitimate asset class and paving the way for increased participation in the market, both by retail and institutional investors.
A broad crypto rally
It’s worth highlighting the fact that it’s not just Bitcoin that is rallying at the moment — many other digital assets are delivering spectacular returns too. Dogecoin is a good example here. In November, it shot up more than 160% — thanks to President-elect Trump’s formation of the Department of Government Efficiency (DOGE). This is going to be led by Elon Musk and Vivek Ramaswamy and investors are excited due to the “DOGE” acronym and Musk’s association with the coin.
Cardano (ADA) and Ripple (XRP) are two other cryptoassets worth highlighting. The former shot up in November after founder Charles Hoskinson announced plans to work with US policymakers to shape crypto-friendly regulations. Meanwhile, the latter gained as investors speculated on a favourable resolution to Ripple’s ongoing SEC lawsuit. The anticipated regulatory reforms could potentially set a precedent for clearer crypto regulations.
Stocks in the crypto ecosystem have also soared recently.
Take Coinbase, for example. In November, its share price spiked as investors anticipated more interest in the asset class. MicroStrategy is another stock that has seen its share price skyrocket. It’s the largest corporate holder of Bitcoin and describes itself as the world’s first “Bitcoin Treasury Company.”
Where to from here?
Looking ahead, many investors believe that the crypto bonanza is just getting started.
Portfolio manager Cathie Wood, for example, believes that the Bitcoin price could go on to hit $1 million in the years ahead. However, there are no guarantees it will continue to rise. This is a volatile asset class and despite the prospect of friendlier regulators, it still faces an uphill battle to get risk-averse legacy banks to service it.
Those looking for exposure to digital assets may want to check out crypto-focused Smart Portfolios such as CryptoPortfolio, which weights cryptoassets by market cap, or CryptoEqual, which offers access to a diversified portfolio of cryptoassets, weighted equally. Another option to consider is BitcoinWorldWide, which provides exposure to the entire Bitcoin value chain.
