Defense Stocks Take Center Stage Amid Global Strife

Image source: General Dynamics

In early February, the meeting between China’s President Xi and Russia’s leader Vladimir Putin at the Beijing Winter Olympics was a watershed event. The leaders pledged mutual “no-limits” support aside from a $117 billion deal for Russian commodities to flow to the world’s most populous country with the second-leading economy.

Less than one month later, Russian troops attacked Ukraine, and the most significant military conflict in Europe since the end of World War II broke out. Russia considers Ukraine Western Europe, while the US and NATO support the country as a sovereign nation in Eastern Europe. Meanwhile, China believes Democratic Taiwan is part of its country and could accelerate unification plans.

Sanctions on Russia could end up being toothless, given Chinese support. The world has become a lot more dangerous in 2022, with the prospects for hostilities among nuclear powers at a new high. At the end of February, Russia increased its nuclear readiness, and Germany moved to increase its military preparedness — significant geopolitical events. The demand for conventional and other weapons looks set to increase over the coming months and years dramatically.

Stock market volatility will remain high

• The Russian stock market crashed under the weight of sanctions.
• European stocks are weak as the continent is on the doorstep of the conflict.
• Chinese stocks are under pressure, with the  iShares China Large-Cap ETF  Chart FXI - $29.53 0.38 (1.27%)   making a new low below the March 2020 bottom last week as investors shun Chinese investments because of the apparent alliance with Russia.
• US stocks have held up reasonably well for now.
• War with a nuclear power challenging the US and Europe should keep stock market volatility high.

Military spending will increase

• The US and NATO countries have dismissed any ideas of involvement in the war in Ukraine.
• The Russians have threatened a nuclear response for “interference.”
• Whether Ukraine falls back under Russia’s umbrella or not, the threat to other former Soviet satellites that are NATO members will remain elevated for years.
• An attack on any NATO member will trigger Article 5 (the key section of the North Atlantic Treaty) and a war with Russia.
• China continues to support reunification with Taiwan, while the US supports Taiwanese independence.
• Worldwide defense spending will increase over the coming months and years.

Defense stocks have been the defensive stocks in this market

• General Dynamics Chart GD - $228.21 1.72 (0.759%)   moved from $208.47 at the end of 2021, to $245.29 on March 4, 2022, a 17.7% increase.
• Northrop Grumman Chart NOC - $461.72 0.74 (0.161%)   rallied from $387.07 on December 31, 2021, to $468.57 on March 4, a 21.1% rise.
• Raytheon Technologies Chart RTX - $97.93 0.56 (0.575%)   moved higher from $86.06 at the end of 2021, to $99.59 on March 4 or 15.7%.
• Defense contracts will increase given the geopolitical landscape, and defense stocks could be the most defensive investments over the coming weeks and months.

Look to the leaders

• The leading defense contractors are positioned to get the most substantial contracts.
• Germany has declared it will dramatically increase defense spending, opening a new and profitable customer for the defense companies.
• GD, NOC, and RTX are leading military contractors who will see increased business and profits in the US and with allies in Europe and worldwide.

Faith Conquers Fear and Logic Conquers Greed — Hope for the best

• Vladimir Ilyich Lenin, the first and founding head of government of Soviet Russia from 1917 to 1924, said, “There are decades where nothing happens, and there are weeks where decades happen.” The words of the brutal dictator ring prophetic after Russia invaded Ukraine on February 24, as it has changed the geopolitical landscape, and people worldwide will adapt to the risks of the new dynamic.
• Albert Einstein said, “I know not with what weapons World War III will be fought, but World War IV will be fought with sticks and stones.”
• We must have faith that this tumultuous time will pass, and despots will receive what they deserve.
• Be logical, pay careful attention to risk-reward dynamics, and avoid fear and greed impulses. Faith conquers fear.

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Source: Equities News