Implications of the Tensions in the Middle East
Events in Israel
Over the weekend, the Hamas militant group invaded Israel. The surprise attack was initiated by large-scale missile bombardment, which evolved into infiltration of Israeli cities by land, sea, and air. Israeli PM Netanyahu has declared war against Hamas and Israel Defense Forces have counter attacked Gaza. In total, more than 1,100 people, which included many civilians, were killed in Israel and Gaza. In our opinion, the event highlights the delicate nature of Middle Eastern and Global diplomacy. As a result, we expect higher domestic and international defense spending.
Global Defense Spending Implications
The US provides Israel with $3.3 billion of Foreign Military Financing annually, and an additional $500 million for missile defense spend. Further, in 2022, Israel spent $23.4 billion on defense, which was up sharply from 2017, when the country spent $19.3 billion. With these dynamics in mind, we anticipate increased United States Foreign Military Financing to Israel. Additionally, Israel is likely to grow defense spending at a higher rate than the 3.9% CAGR over the last five years. All signs point to higher global defense spending given the heightened risks globally. For better context as it relates to global defense spending, NATO currently spends about $1.26 trillion on defense annually, an increase from $980 billion in 2018 or a 6.7% CAGR. Of total NATO spending, the US spent about $860 billion in 2023 and will likely be higher in 2024.
Opportunities in Defense
We think the structural shift in higher defense spending will be a strong tailwind for United States defense operators. Further, we have the long-term view that geopolitical volatility will remain heightened with countries such as Russia, China, Iran and North Korea. In short, the world is becoming more dangerous and increased defense spending is required to offset these global risks. In terms of opportunities, we find companies with missile and propulsion capabilities to be most attractive. As a result, we continue to buy L3Harris (LHX-NYSE), which recently acquired Aerojet Rocketdyne and will have exposure to missile propulsion. Additionally, we would buy the two largest US missile OEMs, Lockheed Martin (LMT-NYSE), and RTX (RTX-NYSE).
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Tony Bancroft Michael Burgio ©Gabelli Funds 2023
(914) 921-5083 (914) 921-7797
tbancroft@gabelli.com mburgio@gabelli.com
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This whitepaper was prepared by Tony Bancroft and Michael Burgio. The examples cited herein are based on public information and we make no representations regarding their accuracy or usefulness as precedent. The Research Analyst’s views are subject to change at any time based on market and other conditions. The information in this report represent the opinions of the individual Research Analyst’s as of the date hereof and is not intended to be a forecast of future events, a guarantee of future results, or investments advice. The views expressed may differ from other Research Analyst or of the Firm as a whole.
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