The Fluid War Scenario

As the brutal Russo-Ukrainian war continues unabated, Ukrainian forces are receiving a plethora of US/Nato and western allies military aid that have kept the Russian military from seizing most cities, notably the capital Kyiv. As a follow-up to my SA article The US Defense Industry's War Stimulus published 2 February 2022, three weeks before the Russian invasion of Ukraine, US defense stocks have performance exceptionally well. I believe that US defense industry stocks are poised to continue their huge gains as they capture greater global market share.

Russia's modernized military, although vastly superior in numbers and firepower to Ukraine's, has been stymied by Ukraine's motivated and determined defenders. The Ukrainians have utilized the basic but effective, easy-to-use, highly mobile anti-tank weapons furnished by US/Nato that include:

• The Javelin and Next Generation Light Anti-Tank Weapons (NLAWs).
• The lumbering Turkish Bayratakar TB2 drones which rely on electronic innards made in US and Canada.

The Weaponry Demand: Near, Medium & Future

With respect to the immediate need, Ukraine urgently requires additional military assistance as the Russian military continue their bombardment and advance on Ukrainian cities.

The near future needs are the manufacture, inventory replenishment and export of US/Nato and other western allies' weaponry to present-day and possibly post-war insurgents.

With respect to the medium to long-term needs smaller European countries such as the Nato member Baltic countries and non-Nato countries such as Moldova are fearful of becoming Russia's next target. Furthermore Middle East countries are wary about Iran, South Korea's perpetual suspicions about North Korean intentions and other Asian countries who are suspicious about an emboldened and expansionist-minded China. However one assesses the Russo-Ukrainian war, the world has become a far more dangerous place.

The Investment Opportunities

Some of the largest US defense contractors are Boeing, Northrup Grumman, General Dynamics, Raytheon Industries and Lockheed Martin that represent the tip of the spear to protect America in an increasingly dangerous world with highly capable and motivated enemies such as Russia, China, Iran and North Korea.

The link to the bar chart entitled The World's Biggest Arms Exporters provided by the Stockholm International of Peace Research Institute (SIPRI) presents a listing of these companies and sales from 2017 to 2021 with the US continuing to be the overwhelming dominant player in this market.

Huge Gains on Recommended Stocks

Below is a chart indicating the largest firms and their respective NYSE stock tickers from my aforementioned SA article, their specialties and market performance for the past month almost to the day since the beginning of the Russo-Ukraine war. Every stock has posted exceptionally gains during this period except Boeing.

Below is a chart indicating the available Exchange Traded Funds (EFT) from my aforementioned SA article, for those investors who prefer defense industry sectors and their one-month performance since the beginning of the Russo-Ukraine war, all of which have provided exceptional returns:

Globally countries have pledged to dramatically increase military spending. The link to the following chart entitled Eastern Europe and Asia Spend More on Military provided by SIPRI indicates the dramatic increase in spending of Eastern European countries well before the Russian invaded occurred in February 2022.

Double Edge Investment Sword

As explained in the aforementioned passage, the US defense industry appears to have an increasing market share dominance over Russian weaponry sales going forward. However inflation has increased dramatically resulting in present-day fiscal and political challenges.

Firstly for many years the US defense industry's inflation projection was based on an inflation rate of 2.2%. Nowadays it's suddenly closer to 7.7% causing a serious budgetary crimp in fulfilling the US defense industry's needs even beyond the pre-Russo-Ukrainian war requirements.

Secondly, with the fast-approaching 2022 midterm elections, US governmental authorization for an aggressive defense budget increase in 2023 will be contingent on the political make-up, situation in Ukraine and elsewhere.

There will be competition in funding, between the US defense industry export needs to support government foreign policy and civilian demands creating a potential "crowding out" scenario.

Within the military tough fiscal decision will have to be made with respect to new long-term contracts for critical materials like aluminum and titanium and prioritizing expenses between daily fuel, labor and materiel costs vs R&D.

Even with a generous 2023 increase the US defense industry sales may not rise as much as anticipated. Although mainstream news sources dramatize and promote sophisticated, high-tech trophy weaponry, historically conflicts around the globe rely primarily on small arms. Basic weaponry regardless of origin, is operationally efficient & effective with the huge price tag and subsequent specialized training, maintenance and spare parts.

For this reason Russian small arms and basic weaponry may still maintain market share to countries whose objectives are internal control against political enemies, restive citizenry and indigenous insurgents rather than foreign expansionist pursuits.

Thirdly, most countries whether democratic or autocratic will have to make excruciating expenditure decisions between weapon and food. As discussed in my recent SA article entitled Buy Opportunities with Tightening Global Agriculture Markets published prewar on 19 February 2022 articulates this growing global dilemma. Governments will have to make the mutually exclusive choice between mitigating the short-term internal security threat of civil unrest or medium-term hostile threats from a nearby rival country.

Conclusion

For the aforementioned reasons the US defense industry, as the tip-of-the-spear, vanguard of global democracy, have convincing arguments in persuading and receiving additional government funding for both present-day and near future requirements. For this reason I continue to be bullish with respect to US defense industry investments.

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The Cerulean Council LLC is a NYC-based think-tank that provides prescient, beyond-the-horizon, contrarian perspectives and risk assessments on geopolitical dynamics and global urban security.