• European Security Capabilities in the spotlight after Russia’s invasion of Ukraine
• South Korea’s Defense industry stands out as one of the World’s Top military industries

The Wall Street Journal (WSJ) reports on the security insecurity caused by the weakening of Europe’s military power since the Cold War.

Since the Cold War, Europe has been cutting defense spending, and the resulting weakening of its military power has led to Russia’s invasion of Ukraine. Along with economic security threats, it faces real military security threats.

Russia has the military capability to threaten not only Ukraine, but other Eastern European countries, including the Baltics, and there is growing anxiety in Europe that Russia will attempt to revive its former hegemony.

Europe’s rearmament could be an opportunity to invest in South Korea and U.S. defense stocks.
In particular, it has been observed that the South Korea defense industry is able to deliver weapons and armament systems most quickly, and interchangeability is relatively easy.

• Security Free Ride Controversy…European Rearmament Possible

Europe has been cutting defense spending for years, ever since the end of the Cold War. By relying on the U.S. military for their security needs, European countries have enjoyed a so-called peace dividend, which means they have been able to cut defense spending while providing generous welfare benefits to their citizens, such as pensions and healthcare.

The United States has consistently demanded that Europe increase its defense spending and that European countries take responsibility for their own security, and what has emerged from this process is the “security free ride” theory: the inability of European countries to solve their own security problems and to rely on NATO, with the United States paying 70% of NATO’s defense budget.

After Russia’s invasion of Ukraine, Europe faces real military security challenges. The Russian threat has been reignited and, most notably, Europe has seen its weapons production capacity severely weakened.

Many analysts believe that Europe’s weapons production capacity has been eroded by years of defense cuts and will face welfare budget challenges as its population ages and political opposition to increased defense spending.

• No. 1 Defense Spending in Europe, United Kingdom: 150 tanks and 10 artillery pieces
• France, No. 2 in defense spending in Europe: 90+ heavy weapons

The South Korean Army has about 2,200 tanks and 7,000 artillery pieces, which puts the armed forces of the United Kingdom and France in a vulnerable position. Russia loses over 90 heavy weapons per month on the battlefield in Ukraine, similar to France’s heavy weapon reserves. Denmark has no artillery power, no submarines, and no air defense, and the Netherlands has disbanded its tank corps and handed over its tanks to the Germans. Germany only has enough ammunition for about two days of combat, and NATO members’ defense spending during the Cold War was about 3% of GDP, but by 2014 it had fallen to about 1.4% of GDP. NATO members agreed at a 2014 meeting to increase defense spending to about 2% of GDP within 10 years. As of 2023, only 11 of NATO’s 31 members are expected to reach this level.
South Korea’s defense spending is at 2.7% of GDP.

Over the past decade, the EU’s defense spending has increased by 20%, while Russia’s has increased by 300% and China’s by 600%.

• Europe focused on counterterrorism
• Russia-Ukraine war emerges amid tanks’ uselessness

In the past, Europe has focused on counterterrorism as opposed to all-out warfare, such as nation vs. nation warfare.
The focus on counterterrorism, both in the form of terrorism within Europe and war in the Middle East, which is close to Europe, has led to increased investment in light armor and personal equipment.

This is when the “tank irrelevance theory” emerged.
This means that tanks have become largely irrelevant on the battlefield. The disappearance of all-out warfare on the plains and the emphasis on the role of air superiority, drones, and the like supported this theory.

However, the Russian-Ukrainian war has brought attention back to tanks and artillery. Poland, Finland, and other countries are pushing to import tanks, self-propelled artillery, and more, with Poland, in particular, using its South Korea defense companies to import fighter jets, tanks, and armored vehicles. Poland plans to spend more than 4% of GDP on defense next year.

Europe now needs to develop a military capable of all-out warfare in counterterrorism, and will likely increase its defense spending to do so. In the process, it will need to rebuild its supply chain to produce its own military equipment, and until it is fully rebuilt, imports from major defense companies such as South Korea and the United States seem inevitable.

• Core : U.S. Defense Stocks
• Satellite : Korean Defense Stocks

Despite the recent export news from the Korean defense industry, the core of global defense performance is still the U.S. defense industry, which is why we recommend U.S. defense stocks and U.S. defense ETFs as the core of a defense stock investment strategy. If you have a core, we recommend Korean defense stocks and Korean defense ETFs as a satellite defense stock investment strategy.

• US Listed ETF : (ITA ETF)iShares U.S. Aerospace & Defense ETF
• South Korea Listed ETF : ARIRANG K방산Fn ETF

Major U.S. defense stocks include Lockheed Martin, Boeing, Northrop Grumman, and L3Harris.

Major defense companies in Korea include Hanwha Aerospace, Korea Aerospace, and Hyundai Rotem.

In recent years, the global diplomatic and security landscape has become increasingly volatile, with the Russia-Ukraine war, the Israeli-Hamas war, and the U.S.-Chinese hegemonic rivalry, as well as China’s possible invasion of Taiwan.

In particular, increased defense spending by the European Union and NATO member countries, which are classified as the world’s major developed countries, is expected to increase the growth of the global defense industry, creating investment opportunities.

Powered by, THOTH Investment