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Xi References ‘Winning Wars’ While Outlining Military Priorities
Soundbites out of the National People's Congress remained foreboding on Wednesday.
A day on from an acerbic press conference featuring new foreign minister Qin Gang, Xi Jinping told PLA representatives that it was imperative for China to consolidate and enhance its "integrated strategic capabilities."
Apparently donning an army-green suit for the occasion, Xi said the military needs to coordinate with the broader economy, and hasten efforts aimed at attaining high-tech autonomy such that the c
If I recall, during the Cold War the expense of the arms race was such an economic burden on the USSR that Gorbachev was eventually forced find a way out, which led to glasnost, perestroika, and eventually the breakup of the Soviet Union.
The West can clearly outmatch today’s Russian economy in a similar manner. However, if there is a similar arms race between the West and China, the contest will be much more difficult and may play out differently. Is it impossible to see the US eventually finding itself in the former USSR’s dilemma? Or both the US and China finding themselves there?
Investors – in the West and in China – are probably not assuming, or prepared for, a large and generational re-allocation between guns and butter.
The portfolios I manage have been stuffed with defense names for the last two years. While those names have outperformed the broad market, their valuations still do not (in my opinion) embed Global Arms Race II levels of spending growth. Names exposed to other aspects of US spending – from healthcare to inflation / rate-sensitive – probably do not embed the risk to “butter” implied by sustained high-single-digit growth in “guns”.
I don’t know if this will come to pass, and it seems like an undesirable outcome. But heavy overweights in defense continue to look sensible, to me.
Makes sense. Have you found defense companies focused on producing gear for modern warfare rather than sitting duck aircraft carriers? RTX and LHX seem to check some boxes but I’m sure I’ve missed some.
For missiles, missile defense, electronics, space, fifth-gen fighters, etc there’s the prime contractors LMT RTX NOC. LHX is a second-tier trying to become a prime, not sure how great the AJRD acquisition is but the core communications biz is good. HII is carriers and nuclear subs. GD is notable for the land exposure (Abrams MBT, etc) in addition to attack subs (Electric Boat and HII build all the Columbia and Virgina class subs, note AUKUS deal) and other stuff. BA EADSY GE RR are not pure-play defense, though commercial aero has its merits. European names like BAE Leonardo Rheinmetal Dassault SAAB as well.
Things to have opinion on
1. How much will Europe & US build up for land war (MBT, APC, artillery, MLRS, anti-missile/drone, tactical comms, and lots and lots of ammunition). That’s a type of procurement that has been dormant thus potential for big upside?
2. How much business will Europe keep at home? Gripen and Eurofighter have been losing deals to F35 and the Euro consortiums may not have a fifth-gen fighter for a decade. But for tanks and other land equipment, Europeans seem competitive.
3. Is there a way to play South Korean defense industry? Israeli?
4. Are there small names with big upside? It’s been tough being a supplier squeezed between the giant primes and supply chain inflation. I’ve been watching some but no strong conviction yet.
5. Who will the former customers of Russian defense export industry turn to? Performance in Ukraine has been bad publicity for Russia weapons, plus do you want to find your shiny new weapons system is cobbled together from washing machine chips?
Thanks JL. Loved your last sentence.
The Koreans are big ammo producers. (If you happen to be a buyer of pistol ammo in the US you know they sell at reasonable prices.) But I read that export restrictions limit how much they will sell overseas. Perhaps I was misled so maybe worth some digging.
It’s interesting to ponder the bifurcation of weaponry needs between the European and Pacific theaters.
Thanks again.
South Korea’s K2 MBT is getting big deals in Europe, esp Poland and other Eastern European countries distrustful of Germany and hence of Rheinmetall, whose Leopard is getting its share of deals (Italy, etc) but not cleaning up. I’m not sure how one invests in this.
Still Rheinmetall should do well, it has such a range of armor, anti-armor, anti-air, etc platforms.
https://foreignpolicy.com/2023/01/30/south-korea-europe-k2-tanks-defense-partnerships-germany/
I’ve been sniffing around a little name whose cable modem/optical component biz is dying but seems to have acquired its way to be the primary non-captive supplier of inertial navigation for missiles, drones, guided bombs, submarines, torpedos, aircraft, tactical comms. (Inertial nav gets you to target when GPS and external guidance are jammed.) Chart is horrific and quarterly calls are full of excuses, but I keep it on the screen. Balance sheet is ok.
Yes, between Russia and China, every kind of defense contractor has opportunity. A new Golden Age for the merchants of death.
I didn’t know Korea was a big pistol ammunition supplier! My rimfire is mostly UK/European (Eley, SK, etc) and I’m going to start reloading centerfire because hardly any commercial supply for light WC or SWC loads.