NATO membership bid offers Swedish defence companies a solid opportunity
In response to Russia’s invasion of Ukraine, Sweden and Finland applied for NATO membership in May 2022. In July 2022, 28 of 30 NATO member countries had ratified Sweden’s and Finland’s membership applications except Hungary and Turkey. While Hungary’s prime minister has said Hungary will ratify the applications by early 2023, Turkey continues to oppose them. Putting aside Turkey’s reservations for now, if Sweden and Finland receive ratification from all NATO member countries, it would help them significantly, particularly Sweden, as it is the largest economy in the Nordic region with the lowest military spending. Sweden currently spends 1.3% of its GDP on the military vs Finland’s 1.9% and the Nordic region’s c.1.6%. Integration into the NATO structure requires a defence spending target of 2% of GDP; Sweden is expected to achieve this by 2026, two years earlier than previously planned, implying an incremental market opportunity of USD7.3bn over 2023–26. We recommend that investors keep an eye on this development, because if Sweden obtains ratification from Turkey, investing in Swedish defence companies would generate solid returns in the next few years.
Sweden is better positioned than Finland to reap the benefits
While both countries are interested in joining NATO, Swedish defence companies would have more potential opportunities than Finnish ones. This is because Sweden is the largest and one of the fastest-growing economies in the Nordic region, while its military spending as a percentage of GDP is the lowest in the region, including lower than Finland’s. Hence, NATO’s defence spending target of 2% of GDP offers substantial headroom for Swedish companies. In addition, if the bid goes through, there will be opportunities for defence exports, as NATO member countries draw military expertise and capabilities from member countries. The following charts shows how much Sweden has to gain if the NATO bid goes through.
Swedish companies poised to benefit from the NATO bid
The following are some of the companies engaged in defence equipment, weapons, cyber security and IT solutions space that could benefit from this development. Interestingly, all of them have outperformed the Stockholm index on a year-to-date (YTD) basis; we believe this is driven primarily by the NATO membership bid.
Caveat — Turkey remains a hurdle
Despite the enthusiastic support of the US and Europe, Sweden’s and Finland’s NATO membership bids took a different turn after Turkey announced its security concerns. Turkey alleges that both Nordic countries support the Kurdish militant group PKK, which Turkey considers to be a terrorist organisation and which has been fighting Turkey for the past 35 years. Turkey has also alleged that Sweden is granting political asylum and financial assistance to PKK members. Discussions between Sweden and Turkey have been going on since the last NATO leaders’ summit in June 2022. Both Sweden and Finland have responded positively to Turkey’s concerns on the fight against terrorism and the extradition of terrorists. Additionally, diplomatic traffic between the US, Sweden and Finland have intensified of late, and both Nordic countries expect the US to convince Turkey and soften its reservations about the PKK/PYD. Given that both Sweden and Finland want their NATO membership bids to be approved as soon as possible, we expect interesting developments in this space soon.
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About the Author
Shiba Kumar Khuntia is part of the Investment Research team at Acuity Knowledge Partners. He has spent more than four years in his current role covering the U.S. Industrial Machinery at Acuity Knowledge Partners and currently supports sell-side clients with research assignments including industry research, economic research, thematic reports, and earnings reviews. He holds an MBA in Finance from Rizvi Institute of Management, Mumbai.
Originally published at https://www.acuitykp.com