HomelandDefenseStocks.com Q&A Interview with Scott Sacknoff, SPADE Defense Index ( $DXS)
Point Roberts, WA and Delta, BC - April 23, 2021 (Investorideas.com Newswire)Investorideas.com, a global news source and leading investor resource releases an exclusive Q&A interview through its defense portal HomelandDefenseStocks.com.
Scott Sacknoff, manager of the SPADE Defense Index (DXS), an investment benchmark for companies involved with the defense, homeland security, aerospace, and government space markets, discusses recent developments in the sector.
Q&A Interview: HomelandDefenseStocks.com (HDS) Scott Sacknoff
The following is a transcript of an interview that took place on 21 April 2021 between
InvestorIdeas.com and Scott Sacknoff (manager of the SPADE Defense Index)
Re-distribution, excerpts, and citation are permitted.
InvestorIdeas.com: The White House has announced its topline budget for the Department of Defense for fiscal year 2022. With us today to discuss the defense sector and topics of interest to investors in the sector is Scott Sacknoff, manager of the SPADE Defense Index-an investment benchmark for companies involved with the defense, homeland security, aerospace, and government space markets.
To begin with, President Biden's call for a national security budget of $753 billion. How does this compare with prior years?
Scott Sacknoff: Overall it is a 1.7 percent increase over the FY21 enacted level. This includes the budget for the Pentagon as well as Department of Energy nuclear programs and other defense related activities outside of the DoD. Of this total, $715 billion is directed to the Pentagon, a 1.6 percent increase over the FY21 enacted level of $703.7 billion. The goal of the White House at this time appears to be striking a balance between progressives on Capitol Hill calling for reduced budgets and defense hawks seeking a 3-5% annual gain to cover inflation. Overall, it is slightly more than the flat budget many expected.
InvestorIdeas.com: Only a top line number was released. When should we expect details?
Scott Sacknoff: When there is no change in an administration, a full detailed budget request is typically released in February by the White House. When an administration changes control, a delay is common. We anticipate seeing something in May or early June. A new team can only change so much in a compressed timeline.
InvestorIdeas.com: The Pentagon, NASA, and other agencies typically provide a five-year outlook on its spending as part of the budget release. Will that be published as well?
Scott Sacknoff: It is doubtful that what is known as the Future Years Defense Program (FYDP) projections will be completed in time. The Biden Administration will likely want to put its own stamp on defense strategy and will seek to shift the budgets accordingly. The impact of any changes won't really be felt until FY23.
InvestorIdeas.com: Are there any other factors influencing FY23 and beyond?
Scott Sacknoff: There will undoubtably be debates regarding the budget and the deficit, first with increasing the debt cap later this year and then with the FY23 budget expected next February. For the past several years, Congress has been operating under the Budget Control Act restrictions. With the expiration of the BCA, Biden has stated that he wants to boost nondefense spending by 16% to $769B, which they state is 3.3% of the US GDP, roughly equal to the 30-year average. How this impacts defense spending at this time is not really known. A growing economy over the next 12 months or a rise in global conflicts post-COVID could dampen any impact.
InvestorIdeas.com: Which areas of defense will likely benefit?
Scott Sacknoff: General Mark Milley, the chairman of the Joint Chiefs of Staff, has advocated for "heavy investment" in sea, air, and space-centric platforms. The Administration stated it will prioritize R&D spending to drive innovation and develop next-generation capabilities. Based on comments, shipbuilding including next-generation attack submarines, remotely piloted vehicles and drones, the B-21 bomber, and space systems are likely to benefit. New investments, such as DARPA's LongShot program or a recent hint to a next-generation fighter aircraft platform, are likely to emerge.
InvestorIdeas.com: Which areas will be negatively impacted?
Scott Sacknoff: To pay for the above, the Pentagon will likely redirect resources from legacy programs and reduce the current size of the Army. Additionally, while spending on nuclear missile modernization under the Ground Based Strategic Deterrent program (the replacement for our ICBMs) will rise dramatically over the coming decade, a restructuring to free up capital is likely to occur.
InvestorIdeas.com: How does the elimination of the Overseas Contingency Operations budget line-item impact firms?
Scott Sacknoff: It really doesn't. The OCO was created to cover unforeseen costs in the war on terror and to bypass the Budget Control Act spending limits, since war spending wasn't subject to the cap. OCO spending has declined significantly in recent years and will be integrated into the base defense budget.
InvestorIdeas.com: Any other insights from the budget release?
Scott Sacknoff: The document specifically states that the top challenge of the DoD is to counter the threat from China and deter "destabilizing behavior by Russia." Additionally, it mentioned that the Pentagon will likely play an increased role in, "programs that support biological threat reduction in cooperation with global partners, emerging infectious disease surveillance, biosafety and biosecurity, and medical countermeasure research and development."
InvestorIdeas.com: In your most recent SPADE Investor newsletter, which is available for free on your website, you mentioned that an important growth area for defense firms has been international sales. And that it is important to see what policy the White House takes in this area.
Scott Sacknoff: For a number of firms, sales to nations outside the United States, its strategic partners and others, represents significant revenues and is highly profitable. There was a question about how this new Administration would handle these requests, which many times can require DoD, Department of State, White House, and/or Congressional approval. In late March, the administration approved a number of smaller deals to NATO, Jordan, and Chile while restricting purchases of weapons by Saudi Arabia, due to its involvement with the assassination of an American journalist and publicized atrocities in its war with Yemen. So, it remained unclear what direction the White House would go-activist or more free market. This appears to have been clarified when, in mid-April, the White House gave its blessing to a $23.3 billion arms sale to the UAE that many believed would be canceled or at least significantly delayed.
InvestorIdeas.com: Before we conclude, how did the sector perform in the first quarter or 2021?
Scott Sacknoff: The SPADE Defense Index gained 7.12%, outperforming the S&P500 which gained 5.77%. And in early April, the Index once again hit historic highs.
InvestorIdeas.com: Thank you for taking the time to update us on the sector. For more information about the SPADE Defense Index, please visit spadeindex.com/defense. To learn more about the Invesco Aerospace and Defense ETF (NYSE: PPA) that tracks this benchmark, please visit the Invesco website.
SPADE Indexes LLC is the owner of the trademarks, service marks, and copyrights related to the SPADE Indexes.
This interview does not constitute an offer of an investment product. SPADE Indexes makes no representation regarding the advisability of investing in vehicles based on any of its indexes including the SPADE Defense Index. All information is provided 'as is', for information purposes only, and is not intended for trading purposes or advice. Neither SPADE Indexes nor any related party is liable for any informational errors, incompleteness, or for any actions taken based on the information contained herein. For additional disclosures and disclaimers, please visit the SPADE Indexes website at: http://spadeindex.com/about-spade-indxes/legal-and-disclaimers/
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