In the defense industry – as in many others – the developed world may not offer the best growth opportunities going forward.
Consider: In the Pacific Fleet alone, the United States has five carrier battle groups, with a sixth undergoing retrofitting.
China doesn’t have a single aircraft carrier. It hopes to have one by 2020.
For years, the U.S. has spent more on defense than the rest of the world combined. Today, America spends almost 5% of GDP on defense. China, by comparison, spends roughly 1.4% of a much smaller GDP.
Make no mistake: America will continue to have the largest military in the world – by an extraordinary margin – for years to come.
But, as America’s share of world GDP continues to shrink, so too will America’s dominant edge in military spending.
The largest growth in military spending will be in smaller and developing countries. China’s military spending is undergoing rapid expansion – with double-digit growth now and for the foreseeable future.
As China grows, so do its neighbors. Taiwan must increase defense purchases to continue to have a deterrent to invasion. India must increase defense so as to not lose influence in shared border states – not to mention to protect against Pakistani instability. In fact, India’s defense spending rose over 34% this year.
Even Japan, which already possesses one of the largest militaries in the world, must increase defense spending to offset China’s superior numbers, and China’s nuclear weapons.
Meanwhile, even as Russia turns more hawkish, former members of the Soviet Union increase their deterrent force in order to protect their borders. Every satellite state looks at Georgia, and Chechnya, and starts purchasing weapons.
In all, the four BRIC nations now account for 15% of worldwide defense spending.
With America alone still making up 40% of military spending – and allies in Europe contributing another 25% – there’s no reason to be scared of these increases in other countries.
However, as an investor, one should seriously consider putting money in contractors that cater to the developing world. In defense, America is already the blue chip – safe, secure, but unlikely to grow rapidly. The developing world is equivalent to small caps – greater risk, but much more growth potential and hence greater rewards.
No country comes close enough to American power to constitute a true military threat, asymmetrical warfare notwithstanding. But, in the second tier of military power that makes up all the other great and emerging nations, there is an arms race developing.
With America occupied with its own wars right now – and unlikely to play the policemen again too quickly – the world’s nations realize they have to defend themselves.
As they do so, investment opportunities abound. Don’t be scared to leave our borders to take advantage.
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