Europe is entering one of its most uncertain months in a long time, and investors must get ready for heightened volatility.
The big events, of course, are the "Brexit" referendum in the U.K. on June 23 and the Spanish general elections on June 26, but the refugee crisis and increased geopolitical tensions are contributing to the general feeling of unease.
One thing that is sure is that investors hate uncertainty. However, there is one area that could benefit from heightened uncertainty: defense.
Ever since Russia invaded and annexed Ukraine's Crimea in 2014, there has been increased realization in Europe that the continent's countries must up their defense policy, which had been neglected for too long.
And while it is true that many former communist Eastern European countries have joined the North Atlantic Treaty Organization (NATO), spending on their armed forces was not up to scratch, with many still relying on Soviet-made technology for defense.
In Western Europe, spending as a percentage of gross domestic product had been falling due to austerity measures to rein in bloated budget deficits.
These trends are reversing now, with spending on defense ramping up due to worries over the belligerence of Russia, the increased threat of terrorism and what is perceived in the region as increased reluctance of the U.S. to act as Europe's guardian angel.
A report released at the beginning of the year by several European think tanks in the defense sector shows that spending is due to increase by an estimated average of 8.3% this year from last year in 31 European countries. It would be the first time in two decades that European spending on defense jumps.
In Central and Eastern Europe, defense spending is set to surge by 19.9% while in South-Eastern Europe it will increase by 9.2%, in Western Europe by 2.7% and by 1.6% across the Nordic region.
Bulgaria, the Czech Republic, Slovakia and Poland launched procurement programs to diversify their military supplies and reduce their dependence on Russia by phasing out outdated Soviet-made equipment, the report said.
This can benefit defense equipment producers in the U.S.; Central and Eastern European states have been staunch allies of the United States, grateful for its support for their bids to join NATO in the 1990s.
Poland, for instance, is set to reach the NATO-recommended military spending of 2% of GDP this year, joining the four other members of the alliance that already spend as much: the U.S., the U.K., Greece (yes, cash-strapped Greece, you've read that well) and Estonia, according to a report in the Telegraph.
Experts quoted by the report estimate that 70% of Poland's armory dates back from the Cold War era, with only 30% meeting NATO standards. Poland hopes to reverse that ratio by 2022.
It has already said it would buy Patriot missiles from the U.S., and Raytheon (RTN), the U.S. defense contractor that makes them, could benefit from that. Raytheon has already sold Patriot missiles to Germany, Greece, Spain and the Netherlands. Poland has selected Airbus (EADSY) as a supplier of military helicopters.
Estonia plans to spend more than $900 million over the next four years on military acquisitions, including unmanned aerial vehicles (UAVs), long-range anti-tank missile systems, personal weapons and munitions.
Part of the budget will be spent on the country's Javelin anti-tank systems, to arm them with long-range missiles. Javelin tanks are designed by Texas Instruments (TXN) and produced by both Raytheon and Lockheed Martin (LMT).
For Action Alerts PLUS charity portfolio holding Lockheed Martin, new acquisitions in Europe would be a welcome boost. As TheStreet reported recently, cutbacks in the U.S. defense budget have hurt LMT because demand for its iconic Black Hawk helicopter has been reduced.
Besides a possible deal in Estonia, Lockheed Martin could also benefit from the misfortune of Airbus in Germany, which according to a recent Reuters report is looking at other military transport planes as the A400M cannot land at smaller airports. The report quoted sources in the military as saying Germany might buy up to 10 C-130J aircraft made by LMT.
With political and geopolitical tension increasing in Europe but also in Asia, security issues are back in focus and it might be a good idea to add defense as part of an investor's portfolio. For investors seeking general exposure to the sector, the main ETFs to look at are: iShares US Aerospace & Defense (ITA), PowerShares Aerospace & Defense ETF (PPA) and SPDR S&P Aerospace & Defense ETF (XAR).