Investor Ideas Talks to Scott Sacknoff, manager of the SPADE Defense Index About Current Global Military Conflicts
November 13, 2023 (Investorideas.com Newswire) Investorideas.com, a global investor news source covering defense stocks releases an exclusive Q&A interview looking at the current military landscape as global wars threaten the security of everyone.
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.
It's been an eventful few months, if not the past two years. With us today is Scott Sacknoff, manager of the SPADE Defense Index, an investment benchmark for companies involved with defense and national security.
In this interview, we are going to discuss the year from an investor's perspective and the ongoing actions impacting the defense sector-Russia's invasion of Ukraine, the Hamas attack on Israel and their response, a Cold War-type rivalry forming with China, and the role of the US Congress.
Investor Ideas: Let's tackle each of these. Considering the above military conflicts, one would think investors in defense stocks have been rewarded.
Scott Sacknoff: As we've long stated, the defense sector is a type of insurance against global turmoil. The more worried people are, in general, the greater the support for investing in defense companies and funds.
Following the Russian invasion of Ukraine, defense stocks surged both in terms of price and new investment capital flowing into the sector. People had become complacent in terms of world events and this was a shock. European and NATO nations significantly increased spending on internal security and nearly $100 billion in aid has been given to Ukraine to bolster their response to the invasion. This led to the SPADE Defense Index outperforming the S&P500 in 2022 by roughly 30%. In 2023, the Index has gained an additional 8.5% not including dividends. This is typically a nice annual gain although this year it is below the broader market which has been fueled by a handful of technology stocks. Limiting the defense sector's return has been supply chain issues, that have delayed the ability of the large prime contractors to deliver hardware and weapons destined for Ukraine and replenish US stockpiles. But this is a positive looking forward as today's backlog will become tomorrow's recorded sales as deliveries are made. Additionally, it will also increase US military capabilities and readiness as older, less modern weaponry delivered to Ukraine is replaced by more modern weapons and systems.
Investor Ideas: How did the Hamas attack on Israel impact defense stocks?
Scott Sacknoff: At that point in time, there was a general malaise by investors when it came to the sector. As the war between Russia and Ukraine dragged into a kind of stalemate, political opposition in the US (and the European Union) to continue to fund Ukraine's defense operations began to rise. This is flawed thinking by Congress as the cost to enable Ukraine to hopefully halt Russian aggression there is much less than what would have to be spent to counter any future action taken by Russia against a NATO nation or expansion into Europe.
The Hamas terrorist attack on a music festival, and farming villages, taking several hundred hostages, and of course, the subsequent Israeli response re-engaged attention on the defense sector.
In the two months since this became the lead news items, the SPADE Defense Index has gained more than 7% and investors have increased their holdings in funds, like the Invesco Defense ETF by 14%.
Investor Ideas: Considering the above, what do you expect in the coming months?
Scott Sacknoff: Defense firms are well-positioned to grow through the end of the year and throughout 2024. Since Russia's invasion of Ukraine in February 2022, defense spending in the United States has risen to a record high and many European nations have significantly increased their military budgets to combat the threat of a more aggressive Russia. The result has been many firms with defense lines of business reporting historic levels of backlog orders. In October, Raytheon reported a new record of $190 billion with $75 billion coming from its defense business; Lockheed Martin reported $156 billion. Meanwhile Boeing's order backlog stands at $469 billion for more than 5,100 commercial aircraft and $58 billion in defense. As supply chain issues resolve, companies should see their backlog convert into reported income. With the conflict in the Middle East potentially escalating, global orders for defense hardware should remain strong.
Investor Ideas: What can derail or upgrade your forecast?
Scott Sacknoff: Derail...the key is Congress. Public opinion remains at greater than 60% to continue to support Ukraine and supply weapons to them, yet an increasing number of politicians on Capitol Hill-from both parties-are calling for a reduction or elimination of that support. And for the moment, Congress appears to have, for the most part, taken a stand in support of Israel to root out the terrorist elements in the region. Yet how long that support lasts is unknown. Likewise, we don't know whether support for Israel will be taken out of that provided funds earmarked for Ukraine, creating a net gain of zero.
As far as upgrade, the two conflicts mentioned could very easily escalate into a global situation. North Korea is supplying weapons to Russia; relations between China and Russia appear to be warming; and Iran is supplying drones and missiles to Russia, Hamas, Hezbollah, and others. An escalation in one or both regions could increase people's wall of worry and defense stocks have long proven to be a place investors tend to favor when they fear global unrest.
Investor Ideas: 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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