Back in early 2024 I wrote about the three major themes we were focused on from an investment perspective. The first was AI, the second was energy, and the third was more complex: a world preparing for war.
At the time, I explained that preparing for war was about much more than increased defence spending. It was also about changing supply chains, reshoring manufacturing, securing critical resources and reducing dependence on countries that may not always remain friendly.
More than two years later, I think that theme has become broader still. A better way to describe it today is the national security economy. This is about the economics of sovereignty, security and resilience in a more uncertain world. Governments and companies are increasingly asking, what happens if the system we depend upon suddenly stops working? It’s no longer simply about the cheapest and most efficient way of doing something.
For several decades globalisation was largely built around efficiency. Manufacturing moved to wherever it could be done most cheaply. Supply chains became longer and more complicated. Inventories were reduced. Energy was sourced from the most economical supplier. It worked well, as long as everyone continued to cooperate. That can no longer be assumed. Efficiency still matters, but security matters more.
The infrastructure that makes a country resilient is surprisingly broad. Defence is part of it, but so are electricity grids, data centres, ports, water infrastructure, agriculture, energy production, semiconductor manufacturing and critical minerals. These are not just industries; they are also matters of national security.
Artificial intelligence provides an interesting recent example. Earlier this year the US government designated Anthropic a supply-chain risk following a dispute over how its technology could be used by the military. Then in June, citing separate national security concerns, the US temporarily restricted foreign access to Anthropic's newest models.
Whatever the merits of those decisions, it highlights a much bigger issue. AI models are becoming embedded into the everyday operations of businesses and governments. If your organisation becomes dependent upon one of them, who ultimately controls your access to it? The same question increasingly applies to cloud computing, payment systems, satellites and communications infrastructure. Access to technology itself is becoming a matter of national security.
National sovereignty is starting to extend well beyond borders.
We already understand this when it comes to oil, rare earths and semiconductors. Taiwan Semiconductor Manufacturing Company is perhaps the clearest example. TSMC is an extraordinary business that I would otherwise love to own. But for me there is one major problem. I believe that at some point China will make a play for greater control over Taiwan. I don't know when or exactly what that looks like, but if it happens, the value of TSMC becomes extraordinarily difficult to assess.
That is one side of the investment equation. The national security economy creates risks for companies sitting on geopolitical fault lines. But it also creates opportunities for the companies helping countries remove those vulnerabilities. Some of the biggest opportunities will be in areas far less glamorous than AI or defence.
Water is one. Food is another.
A country can survive without the latest smartphone. It cannot survive without reliable electricity, clean water or food. It is not just food and water themselves that matter. Everything required to produce and secure their supply becomes strategically important. Fertiliser, irrigation, agricultural machinery, water treatment, storage and transport all become part of the national security equation. As governments think more about resilience, security and strategic independence, more investment in this critical infrastructure will inevitably follow.
The world spent decades optimising for efficiency. We built very sophisticated systems on the assumption that goods, energy, technology and capital would continue flowing relatively freely across borders. The next decade will be about building greater self-sufficiency, stronger contingency planning and eliminating single points of failure. That will be expensive and at times inefficient. But that is the price of national security.
General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.