What’s the advantage of having defense stocks? Most industries perform depending on the overall state of the economy.
Some sectors earn higher returns in times of economic expansion and lower returns when economic contraction happens.
In contrast, defensive industries often don’t perform according to that kind of pattern. Defense and military stocks frequently move in the opposite direction of general economic trends.
These types of stocks are counter-cyclical, which is an advantage that’s very attractive to some investors.
2. Protection from the Government
The budget for defense aerospace and security became a priority long before 9/11. Since the tragic event, the demand for defense industries intensified with the government having no plans of reducing Pentagon support.
Defense is one of the few things that both Democrats and Republicans agree on.
In 2018, both parties agreed to allocate $165 billion as an addition to the existing budget. Congress approved this budget as a grant chest for the Department of Defense for the rest of the year.
Interestingly, the budget for the Pentagon will see an increase to $719 billion in 2019. This amount is more than double the annual budget from 2002.
In addition, the government plans on making significantly longer-term commitments towards rebuilding old military equipment. It also aims to improve its system for defense data analytics.
The defense industry gets most of its revenue directly from the US government. This means government spending for defense products and services can make a great opportunity for investors.
3. Market Dominance
Since Trump became president, creating more funds for defense companies has become a priority. This led to the introduction of more powerful and advanced weaponry built by different companies.
There are five U.S. aerospace and defense companies leading the game, and they are often referred to as the “Big Five” in the industry. These companies are:
Lockheed Martin Corporation
General Dynamics Corporation
Northrop Grumman Corporation
The market cap for these five companies alone reaches over $40 billion. When investors and policymakers add together the overall power of US defense companies, the financial muscle of said industry dominates the worldwide market in a way that only a few other sectors can.
4. Transparent Investment
Generally, the commercial marketplace has a dynamic environment where all things unexpected can happen at any time. It can hugely impact different sectors, causing an opportunity or disadvantage to an investment.
This is not the case for the defense sector. It is a business where the negative economic impacts bring great investment advantage, whereas the positive impacts provide mere stability.
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Credit: NASDAQ, WSJ, Financial Times
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