Why US elections gave a lift to defence stocks

The US elections have caused anxiety for many Americans but for arms dealers, at least, it came with good tidings.

Soon after Donald Trump, the Republican president-elect, won the elections on November 9, defence stocks showed an unprecedented upturn. Companies like Raytheon Corp, which specialises in building long-range radar systems and missile-defence shields gained 7.5 percent; and Northrop Grumman Corp, one of the leading military aircraft producers, added 5.4 percent. Both companies hit all-time highs.

The industry had taken a serious hit in 2011, when the US Congress passed the Budget Control Act, which placed a cap on military spending.

Some industry watchdogs suggest that the combination of Trump's pro-war rhetoric, his unpredictability in terms of conflict management, and his electoral promise of lifting curbs from the military budget all contributed to boosting defence stocks.

A closer look at the market, however, suggests that the entire election season worked in the interests of arms dealers.

In January 2016, the industry was reeling from a nine percent drop at S&P; Aerospace & Defense Select Industry Index.

Four months later, however, arms companies began to see it as a sweet spot, as Trump and his Democratic rival, Hillary Clinton, both talked about feeding the US military establishment's insatiable appetite. On this point, they echoed each other, both arguing to lift the curbs on the defence budget and to spur arms procurement.

"Here's what we have to do ... we can't lose our military edge," said Clinton in Cincinnati in early August. "That means giving the Pentagon the stable, predictable funding it needs to make smart investments. We cannot impose arbitrary limits on something as important as our military."

Though Clinton didn't explicitly offer much detail beyond advocating removal of the budget limit, investors predicted that the defence industry was likely to thrive if she won.

Trump went further, offering a more mouth-wateringly detailed policy outline than his opponent did.

"It is so depleted," Trump said in a speech in Philadelphia, in early September. "We will rebuild our military."

He promised to increase defence spending by 15 percent. The funds would be diverted to replace older military equipment, bolster army and marine forces and to expand the air force's fleet by 12,000 aircraft. He also suggested adding 75 surface ships and submarines to the navy.

Then came a policy note issued by Credit Suisse in early October. The investment banking giant speculated that investing in the defence sector would be a safe bet.

Credit Suisse's report argues that growing security concerns around the world would indeed justify either candidate lifting the budget cap on military spending. Outgoing President Barack Obama's 2017 defence budget is close to $600 billion. The bank's analysts hope that scraping the ceiling will allow an increase of at least $80 billion to $90 billion in future years.

With Trump's victory and the US Congress dominated by the Republicans, the common perception among defence analysts is that the conservative president-elect wouldn't face any resistance for increasing the military budget.

So, as far as the industry was concerned, the election was a win-win scenario.

Author: Mehboob Jeelani