Along with the election of President Trump, Republican majorities in both houses of Congress will likely mean an end to sequestration and higher defense budgets in the years to come. The Trump administration has proposed a 10% increase in military spending, yet it remains to be seen what level of spending will actually be appropriated. The administration’s proposal would lift defense spending by $54 billion.
Meantime, President Trump’s recent trip to Saudi Arabia was reported to have resulted in weapons deals amounting to $350 billion over 10 years – $110 billion of which will take effect “immediately”. According to the Council on Foreign Relations, Saudi Arabia is the primary destination for U.S. arms sales – purchasing nearly 10% of all U.S. weapons exports from 2011 to 2015.
The most expensive program at the Pentagon is the F-35 (shown below). President Trump recently said the program was “out of control” and earlier this year negotiated an $8.5 billion contract with Lockheed Martin (NYSE:LMT) to supply 90 jets to the Pentagon. Lockheed’s partners on the jet include Northrop Grumman (NYSE:NOC), United Technologies (UTX), and BAE Systems Plc – all of which are working on a most cost-effective supply chain to feed the production line in Fort Worth, TX.
Lockheed Martin’s F-35. Source: The Jerusalem Post
In addition to the bullish defense backdrop, the International Air Transport Association (“IATA”) reports global passenger demand rose 6.3% last year as compared to 2015 – well ahead of the 10-year average annual growth rate of 5.5%. Gauged by the “RPK” metric (revenue passenger kilometers), growth was particularly strong in Asia Pacific, Europe, and the Middle East:
The IATA sees growth of 5.1% in 2017.
Given these bullish fundamentals in aerospace and defense, and considering the existence of rogue elements like Kim Jong Un of North Korea and ISIS, investors need to participate in the Aerospace & Defense sector.
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