Future of Defence ETF Monthly Report | November

Defence ETFKey Takeaways | November

US seeks to ramp up munitions production for Ukraine/Israel &ndashPresident Joe Biden’s $106 billion defense spending supplemental request to Congress aims in part to bolster munitions production capacity to continue rushing arms to Ukraine and Israel. The U.S. and NATO continue to face a shortage of 155mm ammunition as they are providing those shells both to Ukraine and Israel.

US defence spending sees fastest rise since 2019 &ndashRussia’s invasion of Ukraine has galvanized allied governments to address long-standing shortcomings in defence preparations. NATO is once again committed to collectively defending allied territory and airspace. At their July Vilnius Summit NATO leaders endorsed significant improvements in allied military strategy plans and posture. They also pledged to spend at least 2 percent of their gross domestic product on defence and to devote 20 percent of their military budgets to the modernization of capabilities.

Italy unveils weapon wish list and defense spending forecasts &ndashItaly this year allocated millions of euros to buy new tanks fighting vehicles and rocket launchers as the war in Ukraine revives the demand for land warfare systems. On Italy’s list are 21 High Mobility Artillery Rocket Systems &mdash U.S.-made rocket launchers that have seen success on the battlefield against Russian targets. An initial &euro137 million (U.S. $145 million) is expected to go toward the launchers over the next seven years with the total outlay to reach &euro960 million (U.S. $1 billion). Budget documents also confirmed Italy’s intention announced in July to buy new Leopard 2 A8 tanks to beef up its depleted fleet. For the tanks &euro100 million is penciled in for 2024 and Italy expects to have spent &euro4 billion by 2037 with spending eventually running to &euro8.25 billion. Defence sources said over the summer that Italy’s target is 133 new tanks to meet NATO requirements.

NATO eyes “Quantum Resistant” encryption in 5G drill &ndashNATO member countries have set their sights on securing military 5G communication networks against hacking by adversaries possessing powerful quantum computers. Alliance officials recently hosted an exercise at a test site in Latvia. The event dubbed 2023 Next-Generation Communication Network Technologies was organized by NATO’s Allied Command Transformation. One of the focus areas was to showcase approaches to improve command-and control-capabilities with the use of virtual reality secure post-quantum encryption and apply sensor fusion for situation awareness.

Turkey approves Sweden’s admission to NATO but Hungary remains a hurdle &ndashHungary is the main hurdle to Sweden’s admission into NATO after Turkish President Recep Tayyip Erdogan submitted a protocol to Turkey’s parliament to approve its admission. All 31 allies must endorse the accession. Hungarian officials have said repeatedly that their country will not be the last member to endorse Sweden’s bid but Ankara’s move toward ratification suggests that the time for further holdups may be running out.

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Macro Outlook

For the past 9 years NATO has followed a defence spending guideline seeking member expenditures to be at 2% of GDP and equipment spending to be at 20% of that defense spending by 2024. The “2/20” guideline issue at NATO’s Wales Summit in September of 2014 shortly after Russia’s annexation of Crimea is fast approaching its deadline.

While Russia’s aggressive actions against Ukraine have solidified NATO’s resolve spending remains below the 2% target for most NATO countries. But significant progress has been made on the defense equipment front. NATO itself achieved the 20 percent guideline for equipment expenditures with a median equipment expenditure of 27.80 percent. All current NATO members are estimated as having met the equipment spending guideline in 2023. With Israel joining the spending frenzy defense companies will continue to ramp up production to meet accelerating demand.

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