As analysts and the market try to sort out how the new division in Congress will play out in markets, one beneficiary is becoming increasingly clear. Aerospace analyst Ron Epstein of Merrill Lynch had this to say the day before last week’s election, “The change to Democratic control of the House is the best scenario for defense spending. It points to upside in the defense budget. Gridlock keeps budgets intact, and defense is a bipartisan issue”. That argument is a bedrock of the new view that defense stocks are likely going to surge in the new Congressional environment. Epstein points out that aerospace companies are simultaneously seeing commercial and defense businesses growing strongly.
FINSUM: Earnings seem like they will stay in very good shape for the defense sector, and because budget changes look unlikely, the whole industry seems to be in for smooth sailing.
The Wall Street Journal has published an article which looks at certain sector ETFs and how they might respond to market turmoil. The piece highlights on Aerospace and Defense-focused ETFs and says that many analysts say they have a lot to offer, despite the fact that the have taken “flak” in recent months. There are three ETFs focused on the space, from BlackRock, Invesco, and SPDR, and they have had mixed performance so far this year. However, the argument for them is that the world’s geopolitical tensions are not improving and that sentiment for increased military spending in the US is rising. According to a director of ETF research at Zacks, “The sentiment for aerospace and defense stocks is improving with rising geopolitical tensions”. All that said, the sector is potentially being hurt by a stronger Dollar, a weakening Chinese economy, and lower energy prices (some of the companies make equipment for the sector).
FINSUM: This is an interesting argument, which is part of a more alarming rise in global tensions.
Source: Wall Street Journal