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2016 Defense Stocks Interview with Scott Sacknoff, Manager, SPADE Defense Index (NYSE: ^DXS)

“I anticipate that aerospace, defense, and homeland security stocks should continue to be a stable place for investors” - Scott Sacknoff

 

Point Roberts, WA and NEW YORK, NY - January 14, 2016 (Investorideas.com stocks newswire) www.investorideas.com newswire and Homelanddefensestocks.com (HDS) - Investorideas.com, a digital global news source covering leading sectors including defense and security, releases the following interview with Scott Sacknoff, President of Spade Defense Index (NYSE: ^DXS).

Scott reflects on the performance of the sector for 2015 and looks ahead for 2016.

Scott Sacknoff manages the SPADE Defense Index (NYSE: DXS) which serves as the underlying index for PowerShares Aerospace & Defense ETF (NYSE: PPA). http://www.spadeindex.com/

Interview Q&A

Interview – January 2016

HDS: We are joined by Scott Sacknoff, manager of the SPADE Defense Index, a benchmark for investors interested in defense and homeland security, for his annual review of 2015 and some perspective on what investors can expect in 2016. Mr. Sacknoff, thank you for joining us.

SMS: My pleasure Dawn.

HDS: Looking back at 2015, how did the sector perform?

SMS: I once made the analogy that the symbol for the aerospace and defense sector shouldn't be the eagle, it should be the Energizer® bunny…it keeps going and going. 2015 was obviously a rough year for the broader markets with its first calendar year decline since 2008. Comparatively the defense sector gained more than 3% and the streak is now at five years in a row defense has beaten the market; 13 in the last 16. And the down years include two that produced gains of 10 and 20% gains, and a third that roughly equaled the market.

Top Five Performers in 2015

1.   Mercury Computer   40.00%
2.   Leidos   31.90%
3.   Northrop Grumman   28.10%
4.   OSI Systems   25.28%
5.   Harris Corporation   21.00%

Large Defense Primes in 2015

1.   Northrop Grumman   28.10%
2.   Raytheon   15.12%
3.   Lockheed Martin   12.76%
4.   Boeing   11.24%
5.   General Dynamics   -0.19%

HDS: Can you tell us what drove this performance?

SMS: Key to the performance was stability in Congress or at least a decline in the rhetoric from those lawmakers wanting to cut defense spending. In fact the agency not only got a budget but one at levels they were happy with. Part of this was due to ongoing turmoil around the world and recognition that activities related to defense and homeland security are important. I've always maintained that the sector is a type of insurance and protecting its citizens is a critical role of government. This is not only true of the United States but of the world as a whole and there has been an increase in spending on defense and security which has benefited U.S. suppliers. Lastly, as I've mentioned for a number of years, commercial aerospace is in an expansion phase and continues to build and deliver planes to meet the needs of world travel growth and the transport of commerce.

HDS: Considering the peak in the U.S. defense budget a few years back, international sales seems to be playing an important part of the sector's stability. Can you share with us some data on global defense spending?

SMS: Well, according to SIPRI, an international organization who keeps track of military expenditures, total defense spending in 2014, globally, was $1.78 trillion and it was forecast to be essentially flat in 2015. But the total amount isn't the only factor. There is a rotation factor. While the total was flat, spending in Asia and the Oceania region was up roughly 5% with China and Australia increasing their investments. From a U.S. foreign military sales perspective, which has impact on the public companies investors are looking at, in fiscal year 2015, DSCA, the government agency responsible for approving such sales, approved $47.1 Billion, up from $34Billion in FY2014. A quick look at the November/December timeframe shows $80M for the Bell(Textron) 412EP helicopter for Argentina, $1.2B from Japan for Northrop's Global Hawk UAVs, more than $1B for various items for Taipei, and $180M from Australia for Boeing's CH-47F aircraft. And it is expected to continue. In the first days of January DCSA approved an $800M sale to Iraq for Hellfire missiles and other equipment.

HDS: Were there any other noticeable trends that will impact 2016 and beyond?

SMS: Perhaps because we are becoming numb to it but it doesn't seem like a week goes by without another major terrorist incident happening. The 130 people who lost their lives in Paris last November was just one of many events. In fact, I did some research before this interview and even I was surprised to learn how many acts of terrorism there were. In the second half of 2015 alone there were 241 acts of terrorism recorded. Overall there were 12 terrorist acts where more than 75 people lost their lives. I read in Foreign Policy magazine that a recent University of Maryland study showed that strikes killing 100+ people averaged 4.2 per year from 1978 to 2013, it was 26 in 2014. What this appears to mean is that large scale attacks could be the new norm. Not a pleasant thought but one that is likely on the minds of policymakers around the world.

January

Boko Haram

150-2000

Nigeria

February

Boko Haram

91+

Cameroon

March

ISIS

137

Yemen

April

Al-Shabab

147+

Kenya

June

ISIS

154

Syria

June

Boko Haram

145+

Nigeria

July

ISIS

130

Iraq

August

ISIS

76+

Iraq

September

Boko Haram

80+

Nigeria

October

ISIS

224

Egypt

October   

ISIS

102

Turkey

November

ISIS

130

France


HDS: Looking at 2016, what do you have your eyes on?

SMS: I anticipate that aerospace, defense, and homeland security stocks should continue to be a stable place for investors and the sector tends to have a lower correlation with the economic and currency concerns we are facing. There will be plenty of international attention on troubles around the world, whether it is ISIS, the battle for Syria, tensions between Saudi Arabia and Iran, North Korea's nuclear ambitions, and that's just a starting point. One wildcard is the impact of low oil prices. Will budget issues and a decline in services lead to increased regional turmoil in the oil producing nations? Could this boost global spending on security and surveillance products?

2016 is also a U.S. presidential election year and depending on who the final candidates are one can predict a high level of rhetoric on the defense budget and whether or when the candidate is willing to supply troops to a battlefield. The question is whether investor reaction will be met with trades well in advance of any actual budget action or whether there will be a wait and see approach.

HDS: Turning toward investors, how are they reacting to all this news?

SMS: I've noticed an increase in stories from the financial media and portfolio managers calling defense one of their top picks for 2016. There was a recent article in Barrons and I caught a Jim Cramer segment the other day. This has been backed up by a significant inflow of assets into defense stocks during December and January with trading volume in the Powershares Aerospace & Defense ETF (NYSE: PPA) doubling during the quarter and total assets up 25%.

HDS: Scott, thank you for taking some time with us today.

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