Offence sells tickets, but defence wins championships. Or perhaps beats the market.
Credit Suisse Group AG recommends that investors preparing for a Trump victory in next month's U.S. presidential election should load up on defence-industry stocks like Raytheon Co. and Thales SA. While the candidate's poll numbers have taken a knock after a gaffe-filled week, should he win on November 8 he's said not only that he'll increase defense spending at home but that he'll cajole allies abroad into increasing theirs.
The team, led by Andrew Garthwaite, writes that Mr. Trump has promised to "increase defence spending by 15 per cent," compared to the Obama administration's 2017 budget plans. "Moreover, Trump has suggested that U.S. support for NATO members would be conditional upon them raising defense spending to 2 per cent of GDP" - a requirement that only two European countries currently fulfill. That's just one thing helping to make these stocks "a clear overweight," the analysts wrote in Monday's note.
The suggestion is well timed, as the go-to "Trump trade" of shorting the Mexican peso got less attractive on Friday, when that nation's central bank raised interest rates, sending the currency 1 per cent higher against the dollar. (The peso had been falling in recent weeks as Mr. Trump's poll numbers improved.) Central Bank Governor Agustin Carstens has promised to consider further measures to support the peso should the Republican nominee win the election, pushing investors to diversify beyond the standard bet on a Republican's victory. Just like peso weakness, defence stocks have exhibited a strong correlation with Trump's polling numbers in recent months.
As faith in monetary stimulus crumbles in favor of fiscal measures, Credit Suisse predicts that any steps in the direction of fiscal easing on either side of the Atlantic could deliver another boost to the sector.
"We think it is quite possible that such policies will eventually be focused on physical and social infrastructure, i.e. where there is a payback and a potential benefit to society," they write.
"Defence fulfills both criteria," according to Mr. Garthwaite, who mentions the European Commission's call to widen the European Investment Bank's mandate to financing military infrastructure.
Adding to defence's appeal is the fact that the sector is relatively immune from risks associated with other equity groupings, Credit Suisse says. While commercial technologies may fear competition from China, regulations make that less of a consideration for defense.