Today in his Davos address, President Trump made clear that the U.S. would be asking all NATO nations to boost defense spending to 5% of GDP, up from 2% currently, and above the 4% target he advocated for during his last term.
"I’m also going to ask all NATO nations to increase defense spending to 5% of GDP, which is what it should have been years ago"
While probably an over-ask, there has been a definite tone shift towards military spending of late and we think Canada could get involved in a meaningful way.
Canada is a laggard in defense spending
In the last 5 years, we’ve averaged around 1.3% of GDP spent on defense, falling well short of the 2% target. A disappointing figure, given that over two thirds of our allies are pulling their weight.
At the very least, heightened pressure should get us on a track to get over that 2% mark faster, which would represent a ~$20B jump from today’s levels (5% would represent a $110B jump in spend!).
Growth in spend should benefit familiar names
The percentage of defense spend going towards personnel has been on a steady downward trend for the past ten years, with growth coming from categories like equipment spend instead.
This trend, in combination with a rise in overall spend, leaves a number of Canadian companies well positioned:
CAE Inc. (CAE) - Advanced flight simulators and training systems, which are used in military aviation.
Bombardier Inc. (BBD-B) - Specialized aircraft used in military and intelligence operations.
MDA Ltd. (MDA) - Space-based AI and robotics technologies for defense applications.
Magellan Aerospace Corp. (MAL) - Aerostructures and engine components for next-generation military aircraft.
As well as some smaller companies that have been garnering buzz as of late:
Kraken Robotics (TSXV: PNG) - Underwater robotics and sonar imaging systems for naval defense.
Firan Technology Group Corporation (TSX: FTG) - Specialized electronic components used in defense systems.
