Defense stocks have been rallying since the election on hopes of a big boost in military spending. In his address to the Congress, President Trump said that his upcoming budget would seek “one of the largest increases in national defense spending in American history.” The budget is expected to be released later this month.
Trump is also expected to put pressure on other NATO member nations to step up defense spending. He has also said that China could easily tackle the nuclear threat from North Korea if they wanted to, thus putting pressure on China.
And, North Korea continues to pursue nuclear development, escalating geopolitical tensions in the region. Earlier this week, they fired four ballistic missiles, leading to the deployment of parts of the antimissile system, called Terminal High-Altitude Area Defense, or Thaad, on Tuesday by the US.
The sentiment for Aerospace & Defense stocks improves with rising geopolitical tensions. That is one of main reasons why these stocks performed well in the last few years, despite defense budget cuts in the US and Europe.
Many developing countries including India, UAE, Saudi Arabia and Brazil increased their defense spending over the past few years. Of late, Japan and South Korea have also boosted their defense spending in response to increased military spending by China.
Also, many defense companies boosted their R&D spending to come up with next generation technology products in areas with huge growth potential such as intelligence and surveillance.
Aerospace & Defense Industry is currently ranked 102 out of 265 Zacks Industries (top 38%). Most companies in the group reported better-than-expected earnings for Q4, sending the industry up more than 7% year-to date.
PowerShares Aerospace & Defense Portfolio (PPA – Free Report)
PPA is based on the SPADE Defense Index, a market cap weighted index that tracks companies involved in the development, manufacturing, operations and support of US defense, homeland security and aerospace operations. It is the oldest product in the space.
