Avoided until a few years ago due to a push for ESG orientation, defense stocks now seem to be electrifying private and institutional investors alike. Rising prices, high growth rates, successful IPOs, and massive inflows of funds into specialized fund products are evidence of this. Nevertheless, the topic remains as complex and controversial as ever. “Even though our latest survey of DVFA investment professionals shows a result that tends to favor defense investments, it remains true that investments in this sector should not be judged on the basis of simple blanket assessments,” comments Roger Peeters, Deputy Chairman of the DVFA, on the results.
Over sixty percent currently invest directly or indirectly in defense stocks.
When asked about their current involvement in defense stocks, 37% of survey participants stated that they already make such investments “actively and consciously,” and 24% do so indirectly via funds, ETFs, or indices.
However, 34% are critical of the defense sector, half of them (17%) because they consider the “hype to be exaggerated” and half because they reject investments in this sector on ethical grounds.
Extension of the current boom in defense stocks appears uncertain
For 43% of investment professionals, the current boom in defense stocks is a structurally sustainable phenomenon that will ensure long-term growth for the companies concerned. This does not detract from the fact that the underlying geopolitical developments are unpleasant.
In contrast, just as many participants (43%) see it as a mixed development driven by structural factors as well as exaggerated expectations. And 13% even clearly declare the recent stock market successes of the defense sector to be short-term, cyclical hype with a high potential for setbacks.
Ethical aspects play only a minor role or no role at all.
The verdict on the significance of ethical aspects of investments in defense stocks is quite clear. Overall, six out of seven respondents (86%) are in favor of such investments:
- 56% explicitly consider investments in defense capabilities to be right, and
- 30% have ethical concerns but consider such investments to be justifiable.
- In contrast, only 9% consider it “fundamentally wrong to invest in arms manufacturers.”
- One in twenty of those surveyed (5%) refrained from making a clear statement on this issue.
Return optimization and diversification as the main investment motives
When asked about the main reasons for investing in defense stocks, respondents could choose two of the five options provided. Overall, the answers showed a clear ranking based on the criteria for professional portfolio management: return opportunities and hedging effects through sectoral, regional, and geopolitical diversification were the main reasons.
The importance of the defense sector is likely to increase in the future
Almost six out of ten survey participants (59%) expect the sector’s importance – measured in terms of the number and capitalization of listed defense companies – to continue to grow. A quarter, on the other hand, see it stagnating at today’s level, and around one in seven (14%) even expect its importance to decline.
“The responses, but especially the comments from DVFA investment professionals, clearly show that there has been a fundamental shift in sentiment since the ‘turning point,’” Roger Peeters summarizes the results. “DVFA professionals take a very nuanced view. They discuss distinctions between different weapon systems as well as the fine line between boom and hype. This makes it all the more important to be able to carefully and comprehensively analyze financial data and business models, which is what makes responsible investment possible in the first place.”