Sector Bird’s Eye View: Aerospace & Defense
What is it?
The aerospace & defense Industry serves, as its name suggests, two main markets: aerospace, which largely comprises of the making, selling and servicing of commercial aircraft. And defense, which consists of companies manufacturing military and policing equipment from jets, ships, tanks, and missiles to rifles, bombs and ammunition, surveillance equipment, and uniforms.
Why is it important?
Aerospace and defense is an important component of most economies, with a larger focus in more developed economies with larger government defense budgets. Growing demand for aviation and international travel has driven an expansion in this sector that will continue to grow in influence as populations expand too. The US spends approximately $600 billion every year on defense, which amounts to almost 54% of all discretionary spending by the government, making it an incredibly important sector.
- Aerospace: Boeing, Airbus, Rolls Royce
- Defense: Northrop Grumman, Cobham, Raytheon, Lockheed Martin
- iShares US Aerospace & Defense
- SPDR S&P Aerospace & Defense
- Invesco Aerospace & Defense
When does it do well/badly?
On the retail aviation side, its performance is tied closely to the business cycle. This means that in recessionary times or high interest rates, this sector struggles because consumers cannot afford to travel abroad, which slows production of new aircraft and vice versa for an expansionary period. In terms of defense, the sector performs best in times of elevated geopolitical tension as orders for military equipment increase and often spike in response to ad-hoc threats, but suffer in times of peace.
Why should I invest?
Aerospace & defense is a growing sector with an ever-present demand as humans advance further and require more effective air travel. Government must also always allocate a portion of their budget to defense spending, which fuels defense companies indefinitely. If you are an avid follower of the news, then investing in response to geopolitical risk events can be an extremely profitable strategy when implemented correctly and with sufficient research.