We've heard a lot of bellicose outrage about gutting the US defense sector, but don't worry about it. These defense behemoths will be just fine selling to all the emerging markets looking to build up their defenses, observes John Persinos of Personal Finance.
Put aside overwrought concerns about how the “fiscal cliff” will clobber the defense sector. Demand from rising nations for American know-how in military aerospace will drive profits for top US-based defense contractors, regardless of the budgetary wrangling in Washington, DC.
Post-election overtures on Capitol Hill indicate that Democrats and Republicans will probably forge a compromise and prevent the $500 billion in tax increases and federal spending cuts scheduled for early 2013 that, if allowed to happen, could trigger a recession.
However, in the unlikely event that the dreaded fiscal cliff occurs, US defense firms would still remain awash in orders for lucrative big-ticket items.
The US generates more foreign sales of weapons systems than any other nation on Earth. And one of America’s fastest-growing military export niches is aircraft. Fixed-wing combat airplanes account for one third of all global arms transfers, with US-based manufacturers topping the list of sellers.
Emerging nations are clamoring for US-made combat aircraft that feature highly advanced technology. This demand will more than compensate for European belt-tightening or domestic cutbacks.
Several developing countries are girding against age-old antagonists and homegrown dissent. They also view aerospace as a strategic sector that enhances economic competitiveness; many deals with US contractors entail “offsets,” whereby the manufacturer agrees to joint production with indigenous businesses.
According to analysts’ consensus, the global military aircraft market was valued at $38 billion in 2011; it’s expected to reach $71.9 billion by 2021, representing a compound annual growth rate of 6.58% during the forecast period. The fastest growth will come from regional “hot spots” engaged in arms races.
Here is a look at one bellwether military client with strong economies and full procurement coffers. There are a number of these up-and-coming nations that are emblematic of the long-term demand in emerging markets for latest-generation US fighter aircraft.
Also examined are the US companies that stand to benefit the most from these secular trends. Their shares are now attractively priced, largely because of exaggerated fears of a fiscal and monetary impasse in Congress.