2022 Was a Banner Year for Aerospace & Defense Stocks, What's In Store for 2023?
Vancouver, Kelowna, Delta, BC - December 29, 2022 (Investorideas.com Newswire) Investorideas.com, a global investor news source covering defense stocks releases an exclusive Q&A interview looking at the forecast for 2023.
Investor Ideas talks to Scott Sacknoff, manager of the SPADE Defense Index, an investment benchmark for companies involved with the defense, homeland security, aerospace, and government space markets.
In this interview he reviews the past year and discusses his forecast for 2023 and the themes investors should look out for.
InvestorIdeas.com: Last year at this time, you forecasted that investors in defense stocks would be rewarded for their patience in 2022. Your timing proved to be perfect.
It actually was an easy forecast for us to make. After two down years, there were multiple sector trends and Index technicals that were indicating the likelihood of a rebound in 2022. We obviously couldn't have predicted that our SPADE Defense Index would gain nearly 10% in a year when the S&P500 was down nearly 20% and the NASDAQ was down roughly 30%, but the signs were there to be read. And while we highlighted increasing tension around the world, including the fact that Russia moved troops to Ukraine's border, their invasion in February was not a path that many analysts thought they would take. Nor did many predict the continued logistical failures of the Russian military operation nor the brutality and war crimes they continue to perpetrate. The conflict evolving into a protracted battle has benefitted many firms operating in the sector as the world quickly united against Russia and devoted funds and weapons to support Ukraine. Meanwhile, commercial air traffic was due to expand after being limited during the pandemic and aircraft manufacturers received hundreds of billions of dollars in orders for new planes from the airlines.
2022 saw many investors act on the news of the invasion and the growth associated with international sales and commercial activity driving the share prices of many defense firms to new highs. Funds such as Invesco's Aerospace and Defense ETF (NYSE: PPA) attracted more than $1 billion of new investment inflows as it reached historic highs in price, trading volume, and assets under management.
InvestorIdeas.com: So how do you see this playing out for investors in 2023?
I anticipate much more of the same, even as economists predict that the US will experience a recession. The Biden Administration has shown to be in favor of a strong defense sector and Congress recently passed a budget for FY2023 that increased funding for the Department of Defense by more than $40 billion over last year. Additionally, on top of that there is another $27.9 billion devoted to Pentagon efforts to support Ukraine. This is anticipated to help boost the top lines of many companies operating in the defense sector. Similarly, orders for commercial air vehicles are rising along with passenger and cargo traffic. Space activities by government and commercial customers remain strong. And homeland security issues remain in the news.
As I've mentioned a number of times over the years, the best time to invest in the defense sector is when future security and safety is unknown. Besides Russia/Ukraine, there is also tension between China and Taiwan, North Korea and South Korea, Turkey and the Kurds in Iran, Iran and Israel, the list goes on. Key to 2023 growth via international sales by US defense firms, is that while the recognition by European nations that the threat posed by Russia is real, they have most importantly, matched that with a willingness to increase their defense budgets and acquire US air and missile defense systems and other military hardware. Sales to US allies in Europe should impact the top line revenues of many firms in 2023.
Taking all these things together…expanding military budgets in the United States, expanding international defense sales, and a return to an expansion phase for commercial aircraft deliveries, and 2023 is looking like another great year for defense stocks. An in a US economic environment of rising interest rates, higher inflation, and possible recession, the perceived safety of defense stocks should remain in favor by investors.
InvestorIdeas.com: So, what can derail it? What worries you the most?
Scott Sacknoff: There are a number of external economic factors that bear watching. Historically, a broad stock market drop tends to pull all securities lower in the short-term, however, over longer time periods, defense stocks tend to be less sensitive to issues related to interest rates and inflation. This is mainly due to having its largest customers-national governments-being able to print their own money in order to meet the critical need of providing security. Also defense firms typically maintain low debt ratios, which should protect them from rising interest rates. Lastly, everyone may not realize this, but many defense contracts come with inflation escalation clauses. In fact, the budget just approved by Congress and signed by the President includes $8 billion to address the impact of inflation. Still, the biggest concern would be whether investors withdraw their investments in the sector if there is a peaceful conclusion to the war between Russia and Ukraine. Another thing to watch is if Republican control of the House of Representatives in 2023 and 2024 leads to a reduction in the political will to support funding defense and security. While a minority of Congresspeople favor doing this, they are still just a small minority. The security and the safety of the nation has importantly, never been out of favor for long.
InvestorIdeas.com: Thank you for taking the time to chat with us. For more information on the SPADE Defense Index, please visit spadeindex.com/defense. To learn more about the Invesco Aerospace and Defense ETF that tracks this benchmark, please visit Invesco's website, the ticker on the NYSE Arca is "PPA".
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