Near term, inflationary pressures have been exacerbated by the rise in energy related commodities as Russian oil and gas has become increasingly sanctioned in Western economies.
Similarly, food inflation looks stickier as Ukrainian grain production is forecast to drop at least 50% next year. Most apparent, though, are heightened tensions between Russia and NATO. Relations have soured and thawing looks unlikely. Several NATO countries, after years of cutting their defence budgets are reversing course; now, targeting at least the proposed 2% of GDP spend. Western defence spending across research and development, procurement and maintenance may, therefore, see a historic resurgence.
Thales, a French diversified aerospace and defence company could be a beneficiary. The business has three core divisions and is skewed to military end markets. Defence & Security accounts for over half of revenues and provides broad hardware and software exposure across sensing technologies, communication networks and cybersecurity applications. However, recent acquisitions and proposed divestitures may distract management at an opportune time.
