Is it time to look at defence stocks?

As the US looks at boosting military spending, and other militaries in Asia ponder increasing their budgets, we look at some key US and UK defence stocks.

BAE Systems
Source: Bloomberg

President Trump’s recent push for a US military parade to rival that of France’s Bastille Day display might have attracted criticism, but it comes at a time when the US is mired in a standoff with North Korea, and is looking at boosting its military spending.

The classic UK stock to examine is BAE Systems. Its business will be a key beneficiary of the increased tensions in the Pacific, given its operations all over the globe. In addition, it has strong business links in the Middle East, where rising defence spending continues, thanks to the broader standoff between Saudi Arabia and Iran. At 13.2 times forward earnings and a dividend of 4%, the stock remains one to watch.

Meanwhile, in the US there is, unsurprisingly, an even greater variety on offer for those looking for exposure to the sector. Lockheed Martin, Northrop Grumman and General Dynamics all appear as possible winners from rising global tensions.

Perhaps the benefit of US firms over their UK counterparts would be their broader product spread. Given the post-Cold War consolidation, these big firms are not reliant on one or two defence programmes, but have a suite of products that continue to deliver the goods. Lockheed Martin, for example stands to benefit as the US brings the F-35 into widespread service, while also selling it to its allies. These future users include, of course, the UK, which is set to employ the fighter on the new Queen Elizabeth-class carriers, as well as purchasing it to replace the aging Tornado.

The recent budget fracas in the US, where increased defence spending featured heavily, should remind investors that, with a Republican in the White House, US expenditure on arms should rise. In addition, President Trump plans to deploy more troops to Afghanistan, with General Dynamics a potential beneficiary as it roles out its ‘Warfighter Information Network’ to the US Army.

It is Asia where growth is likely to be strongest. North Korea’s sabre-rattling remains the big news story, but the rising military strength of China, and its regional power ambitions, are perhaps the bigger tale. As a result, nations from Japan to Australia have looked to bolster their capabilities, and have looked to Western defence firms to fulfil new orders.

Man’s insistence on war as a tool of policy may have diminished substantially over the past 30 years, but, as was written on the walls of the Venetian Arsenal in the 16th century, ‘happy is that city which in time of peace thinks of war’. Even Europe has seen pledges to increase defence spending, which means major defence stocks could be beneficiaries over the longer term. 

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