Defence stocks give back gains as investors buy rumour but sell war

{"text":[[{"start":11.25,"text":"Production bottlenecks and uncertainty over the US’s military budget have led investors to sell global defence stocks despite ongoing conflicts in the Middle East."}],[{"start":21.7,"text":"Share prices of leading American defence primes Lockheed Martin, Northrop Grumman, RTX, L3Harris and General Dynamics have all fallen since the US bombed Iran at the end of February, despite the military’s massive expenditure of ordnance over the past two months drawing attention to mounting production backlogs."}],[{"start":40.5,"text":"“[The US has] burned through munitions much faster than we can produce them. Defence companies may get some money up front, but they don’t typically profit until they deliver,” said Steven Grey, chief investment officer at Grey Value Management, which has positions in several global defence stocks. "}],[{"start":59.4,"text":"“If that delivery takes time, why should stock prices have risen more than they already have on profits that won’t be realised for years?”"}],[{"start":null,"text":"

"}],[{"start":67.2,"text":"Lockheed Martin, Northrop Grumman and RTX’s stock all increased by about 50 per cent in the year up to the outbreak of the conflict, powered by US President Donald Trump’s budget request last year boosting defence spending, as well as ongoing turmoil in Ukraine and the Middle East."}],[{"start":84.5,"text":"Melius Research analyst Scott Mikus said RTX, whose defence subsidiary Raytheon produces the Tomahawk missile, “is poised to be an outsized beneficiary of the war in Iran and higher defence budgets”, noting the Pentagon’s 2027 budget request calls for a 189 per cent increase in missile procurement funding."}],[{"start":106.15,"text":"Meanwhile, as the prime contractor for the B-21 bomber and the Sentinel intercontinental ballistic missile, Northrop Grumman was likely to benefit from rising geopolitical tensions leading to increasing nuclear proliferation, Mikus said."}],[{"start":120.30000000000001,"text":"Both companies reported first-quarter sales increases on Tuesday, citing robust demand for their defence systems. “Our defence systems business growth is fuelled by the growing demand for solid rocket motors, smart munitions, ammunition and tactical missiles,” Northrop Grumman chief executive Kathy Warden told investors."}],[{"start":139.85000000000002,"text":"Since then, however, both companies’ shares have fallen about 10 per cent, while shares in Lockheed Martin have fallen roughly 5 per cent."}],[{"start":147.60000000000002,"text":"Funds have also flowed out of defence-oriented ETFs as investors pivoted towards “safe haven” sectors, such as energy and utilities, defying expectations that the war in the Middle East would turbocharge American defence stocks. Almost $1bn has been withdrawn from the $14bn iShares US Aerospace & Defense ETF, which is weighted towards the biggest US defence primes, since the conflict began."}],[{"start":173.75000000000003,"text":"“It is what we call a ‘buy the tension, sell the war’ dynamic,” Mikus said, noting that similar market dynamics had played out in the aftermath of Russia’s full-scale invasion of Ukraine in 2022 and the US-led invasion of Iraq in 2003."}],[{"start":190.55000000000004,"text":"The US military is estimated to have used about 1,000 Tomahawk missiles against Iran over the past two months, about 20 times the 58 Tomahawks funded out of this year’s US Navy budget."}],[{"start":202.85000000000005,"text":"Ron Epstein, a defence and aerospace analyst at Bank of America, said the need to replenish US stockpiles would only increase backlogs that leading defence companies were already struggling to address due to their limited production capacity, helping investors to shrug off the conflict."}],[{"start":221.15000000000006,"text":"“The top-line growth for these defence companies is not going to be constrained by demand, but by capacity,” he said. "}],[{"start":227.65000000000006,"text":"In April, Trump released a budget proposal seeking a 50 per cent rise in the US defence budget to $1.5tn for 2027. But analysts said investors remained wary of the $1.5tn proposal’s prospects given the political opposition it faces."}],[{"start":244.15000000000006,"text":"“The $1.5tn budget has not been priced in because investors know there’s a long way to go,” said Epstein. “It’s a very unpredictable process in and of itself, and then you have midterm elections coming up that make it even more so.”"}],[{"start":257.8500000000001,"text":"Senior Trump administration officials, including defence secretary Pete Hegseth, have coupled their demands for higher defence spending with sharp criticism of big contractors for delayed and over-budget programmes, pledging a radical overhaul of Pentagon procurement practices. "}],[{"start":274.1500000000001,"text":"The administration recently held talks with General Motors and Ford to discuss how the Detroit automakers could contribute to US weapons supply chains."}],[{"start":283.1500000000001,"text":"The prominence of drones and autonomous missiles during the Iran conflict has also fuelled speculation that large contractors could miss out amid a pivot towards a new generation of low-cost defence technologies."}],[{"start":295.8500000000001,"text":"Investors have similarly cooled on European defence stocks in recent weeks. MSCI’s Europe Aerospace and Defense index dropped 9.2 per cent in March, its biggest monthly decline in five years."}],[{"start":309.50000000000006,"text":"Shares in recently listed Czech arms maker CSG have dropped almost a third since the conflict began, while Germany’s Rheinmetall and Renk are down about 10 per cent, and Sweden’s Saab is about 12 per cent lower. Shares in Thales slid on Tuesday after the French defence and technology group disappointed with a mixed outlook."}],[{"start":330.00000000000006,"text":"Robert Stallard, analyst at Vertical Research Partners, said it “could link back to war-related uncertainty, and some concern that we are seeing ‘peak defence’”."}],[{"start":339.50000000000006,"text":"“Where is your upside to a plus-50 per cent annual DoD budget request, with an unexpected military conflict on top?” he said. “Similarly in Europe, there continue to be periodic concerns over the impact of ‘peace in Ukraine’ and what that could do to the regional defence spending trajectory, especially for cash-strapped countries like France and the UK.” "}],[{"start":367.85,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1777123161_1867.mp3"}