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Investors in defense stocks have continued to see their portfolio grow but compared to those investing in the broader market, they have underperformed. That being said, Goldman Sachs agrees has just called it one of their top sector plays for 2022. [Here’s why.]
With stable military budgets in the United States, expanding international defense sales, and a return to an expansion phase for commercial aircraft deliveries, we see 2022 being a great one for defense stocks and, particularly, if one – or more – geopolitical or economic developments unfold.
Below is a list of such potential events In no particular order:
- China annexes Taiwan
- Russia invades Ukraine
- Russia invades Kazakhstan
- Russian submarines disrupt undersea communications cables (a concern raised by the UK)
- Mid-East conflagration (pick your combatants)
- A worsening China-US cold war relationship expands to debt / currency issues
- Joe Biden takes ill
- US social unrest leads to armed conflicts
- North Korea saber rattling to generate attention
- Iran’s nuclear development
- Afghanistan: The crisis after the conflict. What direction does it take?
- A significant cyber war incident traced to a nation/state
- Congress targets defense spending to pay for social programs
- New variant of COVID has Omicron-like spread but more deadly
- Inflation (how fast, how high)
- Rise of fascist-leading political leaders worldwide
- Terrorist incidents delayed by COVID travel restrictions targeting Western nations return
Over the past several years, defense budgets in the United States have remained strong and stable but there was little positive news to provide fuel to the sector after eight consecutive years of returns that beat the market….[Indeed,] the trade statistics are consistent with a quiet period for military action and planning. According to the US State Department, sales of U.S. military equipment to foreign governments during FY20 fell 21% to $138 billion after rising for the past decade.
However, as we venture into the early part of 2022, this is changing. Tensions in areas around the world are beginning to rise…[and] this return to fear and uncertainty is a business environment that should directly impact defense firms, translating into a return of the international sales growth that the sector has seen in recent years….
With stable military budgets in the United States, expanding international defense sales, and a return to an expansion phase for commercial aircraft deliveries, we see 2022 being a great one for defense stocks and historical data back this thesis…
After a 2-3-year decline, defense stocks have historically come roaring back and produced outsized returns for a number of years. Even during the years that defense stocks underperformed the market, those who invested in a portfolio of aerospace and defense stocks still managed a positive return most of the time…
Investors should consider the Invesco Aerospace & Defense ETF (PPA), which tracks the benchmark SPADE Defense Index or one of the 53 companies that comprise the index-including defense prime contractors Lockheed Martin (NYSE:LMT), Raytheon Tech (NYSE:RTX), Northrop Grumman (NYSE:NOC), and Boeing (NYSE:BA).
The above version of the original article by Scott Sacknoff (spadeindex.com) was edited for a fast and easy read.
Editor’s Note:
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