Geopolitical risks boost defence investment potential

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Welcome to Advisor to Go, brought to you by CIBC Asset Management, a podcast bringing advisors the latest financial insights and developments from our subject-matter experts themselves. 

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Nick With-Seidelin, associate portfolio manager, CIBC Asset Management 

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Over the past several years, heightened geopolitical tensions have pushed national security to the forefront of government spending priorities. As a result, we’re witnessing a major global shift that, in our view, will lead to one of the most significant periods in modern history for defence spending. 

Historically, defence spending has averaged roughly 1% of GDP on a global basis. Throughout 2030, this is expected to accelerate to more than four times that historical growth rate, leading to more than $150 billion of annual incremental spend, primarily driven by NATO countries. 

Focusing on Canada, we believe that Canada is on the cusp of a domestic defence revitalization, following a prolonged period of neglect by former political leaders and an overreliance on the United States. Mark Carney’s commitment to spend 5% of GDP on defence and related infrastructure by 2035 is a substantial shift, and compares to just 1.4% of GDP in 2024. 

For further context, defence spending in Canada hasn’t reached 2% since 1990. And the last time Canada reached the 5% level was in the 1950s, following the Korean War. The acceleration in the pace of spending in Canada is also a key factor. The Trudeau government’s prior defence mandate called for $80 billion of spending over a 20-year period. The recent 2025 federal budget plans for the same magnitude of spending over just a five-year period. 

We also see potential for technology transfer agreements between Canada and other countries, much like the rumored collaboration between Bombardier and Saab for the manufacturing and development of Gripen fighter jets. Agreements of this nature would allow Canada to participate in and receive economic benefit from projects that the country does not currently have the capacity to take on independently. 

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The United States represents a significant growth opportunity in the global defence landscape, but it’s also one of the most complex and unpredictable markets in our view. 

Compared to other regions, we consider the U.S. defence sector as later stage and more mature, and a market that also faces limited fiscal capacity, with the country’s deficit expected to remain at or near 8% of GDP. 

Recent announcements from President Trump on potential capital allocation restrictions also gives us pause on the potential for successful stock picking within the U.S. defence sector. 

Lastly, we expect next generation defence platforms, namely SpaceX, Palantir and Anduril as strong candidates to take market share from legacy primes, as they are viewed as being more technologically advanced and better positioned for speed of delivery. 

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Europe is a market that we believe offers a lot of opportunity. Europe is in a unique position as the Ukraine conflict has essentially forced European governments to completely reassess their defence budgets, with defence spending now viewed as mandatory national resiliency versus discretionary foreign policy. 

While we acknowledge near-term headline risk from a potential peace deal between Russia and Ukraine, our views on the durability of European defence spending remain intact. A potential restriction on NATO membership, a cap on the size of Ukraine’s military, and the possibility of Ukrainian land concessions removes a significant and critical buffer between Russia, its ally, Belarus, and the rest of Europe. Multiple instances of airspace violations by Russia has demonstrated Putin’s willingness to repeatedly push the boundaries with other European countries, underpinning the need for military strengthening and preparedness. 

One key area of preparedness in Europe is ammunition inventory. The current NATO standard calls for 30 days of supply, but current levels in Europe sit at just two to three days. Even if the Ukraine War ended tomorrow, which would remove the largest source of consumption, we estimate it would take 13 years to reach the 30-day standard. 

We also note that the EU recently relaxed ESG restrictions, which now allows defence companies to qualify for ESG benchmarks. We believe that this could unlock significant capital flow into European defence companies. 

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Japan is currently facing the most severe and complex national security environment since World War II, prompting a significant shift in its approach to defence. Historically, Japan has capped defence spending at 1% of GDP. However, the election of Prime Minister Takaichi has opened up the possibility of this figure potentially reaching a range of 3% to 3.5% over time. 

Due to Japan’s proximity to Russia, North Korea, Taiwan and China, we believe the country will continue to gradually ramp up spending. We also acknowledge certain fiscal constraints could limit growth, particularly social security costs, as the country’s population continues to age at a rapid pace. 

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One example of how we are taking advantage of the global defence spending trend is a Canadian company called CAE Inc. CAE offers flight simulation and training services, and generates roughly 45% of total revenue from defence clients. We estimate that if CAE is able to capture just 50 to 100 basis points of net new defence spend on an annual basis, they can likely double the size of their defence business within the next few years. 

Also, we view the flight simulation and training industry favourably, as it represents a mission critical component of military spending, and is well-positioned to benefit from equipment modernization efforts over time. 

In addition to CAE, we also view BRP Inc. and Canadian engineering consultancy firms as potential beneficiaries of defence-related spending, albeit to a lesser degree. BRP has an underappreciated opportunity to deliver specialized and modified equipment to the Canadian military, specifically snowmobiles for Arctic operations. We also note BRP’s capability to manufacture drone engines, which we consider a key area of growth as militaries continue to focus on unmanned operations. 

On the E&Cs [engineering and construction sector], we believe increasing participation by AtkinsRéalis [formerly SNC-Lavalin], Stantec, and WSP Global will support incremental growth. Projects covering shipyard optimization, seaport and dry dock construction and military base revitalization across various geographies are considered opportunities for these firms. 

We are not overly concerned about valuation risk, given relatively modest trading multiples for the companies we are currently focusing on. EBITDA multiples in the high single-digit to low double-digit range give us confidence, especially considering the durability and sustainability of the defence spending outlook. 

As a result, we think these companies have lots of room to grow into higher valuations that will become more than justified over time. 

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Given the significant shift towards the use of unmanned equipment — i.e. drones and missiles — space is now considered inseparable from future warfare, and is expected to be a core investment theme. 

As many as 70,000 low-earth-orbit satellites are expected to be launched over the next five years, underpinning annual growth of 22% in the satellite industry. Defence-oriented use cases for LEO satellites include surveillance, particularly in Arctic regions, advanced imagery, secure communication networks and monitoring of borders, and critical maritime and infrastructure assets. 

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The global defence sector stands at the forefront of a generational investment opportunity, driven by rising geopolitical tensions and a structural shift in the focus on national security across North America, Europe and Asia. 

NATO’s renewed targets and various multi-year commitments from some of the largest economies globally will drive a level of investment that far exceeds historical norms. 

Among the most important factors is the scope of the opportunity. As space continues to emerge as a critical domain, we expect investment to extend far beyond traditional military hardware. A focus on unmanned assets will also represent a core theme. 

To conclude, defence remains one of the most critical and resilient investment themes for 2026 and beyond, with structural tailwinds and multi-decade spending commitments creating a compelling landscape for investors.

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