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The AUKUS alliance thrusts the Defence and Nuclear sectors into the spotlight
Jessica Amir
Market Strategist
Summary: The Australia, UK and US defence alliance nears implementation after forming 18 months ago, with the country heads to meet and progress their multibillion trilateral defence deal. This may include Australia buying as many as five US Virginia class nuclear-powered submarines in the 2030s. This reinforces NATO’s drive of encouraging countries to spend 2 per cent of national spending on defence. For the investor, it makes one reflect on the capital being spent in the industry, which may present as a potential investment opportunity to explore.
What is the AUKUS alliance, and why was it formed?
The AUKUS alliance was formed to share defence and military capabilities, and protect the Indo-Pacific region in countering China. But the alliance said its importance has grown in response to Russia’s invasion of Ukraine.
US President Joe Biden will host a meeting with the UK Prime Minister Rishi Sunak and Australian Prime Minister Anthony Albanese in San Diego on Monday, where they are expected to decide on how to move ahead with the submarine plan and get other high-tech weaponry to Australia.
By the late 2030s, a new class of submarines will be built, with UK designs and US technology. While they’re being constructed, it’s expected that either the US will base nuclear subs in Australia, or sell submarines to the nation.
The US and UK are said to be providing Australia with technology and capabilities to deploy the nuclear-powered submarines, which will be based in Australia, given its proximity to the Western Pacific and Indian Ocean. The fleet will also bolster the US submarine presence already there.
The nuclear-powered submarine deal is expected to be double the size of the $90 billion French designed project
This is according to Vice Admiral Jonathan Mead, who has headed the 18-month-long taskforce to acquire the nuclear-powered submarines. It is also expected to generate 10,000 jobs for Australia, which is double what the French project would require.
Adelaide in South Australia, has been ear-marked as the destination to build a shipyard, fit-for constructing nuclear-powered submarines. But hiring workers who are nuclear aware, competent and nuclear experts will prove one of the most difficult challenges of the project, according to Vice Admiral Mead,.
Although we don’t know the financial outlay involved exactly, this alliance underscores the importance of reflecting on the monumental investment in the defence sector. For Australia alone, the AUKUS alliance marks the country’s biggest-ever defence project.
This also follows Australia separately announcing it will double its Royal Australian Airforce cargo fleet, after signing a A$10 billion US military deal, to buy 24 Hercules planes. The cargo planes have historically moved troops, transported equipment in and out of war zones and evacuated civilians. Hercules planes have also made countless humanitarian flights to offer supplies to countries hit by natural disasters.
So once again, the defence sector and potential companies involved are thrust into the spotlight
Potential companies that could be involved in producing the nuclear-submarines, include a major submarine maker, Northrop Grumman. Lockheed Martin is the world’s largest defence company, and the US government’s biggest defence contractor. Lockheed is also the producer of Hercules planes.
Given the rising cashflows and earnings in Defence companies, we've seen Defence shares outperform the market.
Saxo’s Defence equity theme basket has produced some of the best returns year-on-year, among all the baskets we track, with a gain of 25%.
The AUKUS alliance also puts the spotlight on nuclear and uranium companies...
...as the submarines for the alliance are going to be nuclear powered. Given this, we expect nuclear and uranium demand to increase. We encourage you to read more on Nuclear power, in Saxo's detailed report here, which explores everything you need to know about nuclear energy, and potential companies involved.
You can also explore some of the largest nuclear energy producers, via Saxo's Nuclear Power equity theme baskets.
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