The results of the recent mid-term elections, putting Republicans in control of the U.S. House of Representatives, will likely be favorable for the defense and aerospace sector giving positive support to the iShares Dow Jones US Aerospace & Defense Fund (ITA) and the PowerShares Aerospace & Defense (PPA).
Historically speaking, the GOP has been an advocate of strong national defense and a resilient military. As a result of this, the Obama administration’s proposed 2011 defense budget of more than $700 billion is likely to be passed without much restraint.
One reason the budget is likely to be passed is that it will enable the military to upgrade equipment that it uses around the world which will further lead to a sustainable global strength and presence. Secondly, the wars that the US is engaged in around the world do not appear to be coming to an end anytime soon. In fact, most recently, a senior Obama administration official stated that leaders of the Taliban resistance in Afghanistan have no interest in a negotiated end to the war despite increased pressure by NATO and the US. Lastly, China and Russia continue to build and strengthen their respective militaries and in order for the US to remain the strongest military power in the world, improvements and development have to continuously be made in defense software, communications, equipment and training.
At the end of the day, the US is expected to keep a large appetite for defense spending in the near future which will likely bode well for companies which generate a significant portion of their revenues from Department of Defense contracts.
As mentioned above, two diversified plays on the defense sector which give exposure to defense contractors Northrop Grumman (NOC), Lockheed Martin (LKM) and General Dynamic (GD), as well as military software and communications provider, Raytheon (RTN) and aircraft manufacturer Boeing (BA) include:
- iShares Dow Jones US Aerospace & Defense Fund (ITA)
- PowerShares Aerospace & Defense (PPA)
Disclosure: No Positions