Canada’s commitment to pledge five per cent of gross domestic product (GDP) to defence spending by the next decade could serve as a tailwind for the sector, and a needed investment in “self readiness,” one expert says.
The commitment comes amid an ongoing war between Russia and Ukraine, tensions between China and Taiwan and conflicts involving the U.S., Israel, Iran and Hamas.
“Canada has never even met two per cent in decades,” Jeff Hull, senior financial advisor of Manulife Wealth Inc. told BNN Bloomberg in a Wednesday interview.
“So, to have five per cent as a goal for one is actually rather impressive, and that’ll allow countries in the procurement area to really make some wise decisions for that self-readiness, which is what NATO (North Atlantic Treaty Organization) is. It’s not membership dues, like people think. It’s just investing in ourselves and self-readiness so when we get that 911 call, we’re ready to go.”
Prime Minister Mark Carney says the new NATO agreement will see Canada’s annual defence budget increase to roughly $150 billion, according to the Canadian Press.
NATO data shows Canada spent $41 billion on defence in 2024, about 1.4 per cent of its GDP. European countries have also committed to pledge five per cent of GDP to defence after U.S. President Donald Trump spent months saying Europe should take more responsibility for its own security. The United States spent roughly US$916 billion on military spending in 2023, according to Statista.
Investment in defence to support contracting sector
Hull says that while Canada and the U.S. are now more aligned on funding defence, it does not mean the federal government has to purchase weapons and equipment from American contractors.
“They’re kind of bowing to Trump a bit and kissing his ring a bit, but they’re like, ‘Okay, we’ll get to our two to five per cent,’ but that doesn’t mean they have to buy American defense contractors,” says Hull.
“A lot of the Europeans are looking inward to their neighbours. New countries like Finland and Sweden that have joined. France is buying from Germany. Germany is buying from the U.K. They’re now kind of bringing it home a little bit and buying from each other to get to that, but also supporting each other, because they know, ultimately, that’s the real alliance actually in Europe, but the backbone of NATO is the United States.”
The Centre for Strategic and International Studies recently had a presentation on the evolution of modern warfare in the Russia and Ukraine war. Researchers focused on how both sides employ unmanned systems on the battlefield with AI and autonomy.
One device is a dubbed a kamikaze drone – an unmanned aircraft that does not fire missiles but rather crashes itself into a target.
“The last few years has totally changed warfare,” said Hull. “Something that’s evolved out of that is drone swarming with kamikaze drones that are just one-use drones as an example. Ukraine is now the largest manufacturer in the world of military kamikaze drones. They do two million drones a year now.”
Trump is expected to meet Israeli Prime Minister Benjamin Netanyahu next week after the U.S. president brokered a deal between Israel and Iran while the conflict between Israel and Hamas continues.
“Iran provides Russia with most of their kamikaze drones, but Iran was a little busy with Israel, so (Russian President Vladimir) Putin wasn’t getting his kamikaze drones. There’s this interoperability, what I call the butterfly effect. Seemingly nonrelated wars do have an impact,” Hull says.
Hull noted that investors interested in purchasing defence stocks should consider the type of company they’re buying, specifically if they are only manufacturing for militaries or if they have developed products for other sectors.
“Is the military company you’re buying a pure play, like a Lockheed Martin that just does military contracting? Or is it a blend where, like Raytheon, used to be a pure play, but then it joined with consumer products companies, now they have a blend. Boeing is 47 per cent military contracting and 53 per cent civilian aircraft as an example,” he says.
He added that investors should also weigh the pros and cons of buying into large companies like Lockheed Martin or Northrop Grumman, or smaller companies like Elbit Systems or CyberArk.
