Jan
Play it “Safe” or Play “Defense”
The recent deepening of US – Iran conflict, following the killing of Iranian general Qasem Soleimani by a US air strike on January 3rd 2020, sent the global markets in turmoil. Iran’s response of bombing two US-Iraqi airbases early this morning only facilitated to further increase the geopolitical tension.
Naturally, besides the logical rise of Oil prices, Gold has gained the most attention, rising 4% in this period through 1600 USD an ounce, for the first time since 2013.
The rise is predicted to continue further, and president Trump’s speech expected later today will give a further signal about where the conflict is headed, among international calls for peace.
An alternative “safe haven” are defense stocks. The sector historically performs greatly, with the two major Aerospace & Defense ETFs – ITA and XAR, being up in 2019 with 30% and 40% respectively. Part of the momentum last year is due to the continuous increase of US Defense budget – from $639 billion in 2018 to $686 billion in 2019 to $740 billion in 2020.
Following the abovementioned events, the ETFs are expected to open at 4% or more increase since the start of the year. With each side pledging readiness to retaliate for any attack, the deepening of the US-Iran conflict, if not tamed on time, has the possibility to involve Iraq, Israel, Palestine, Lebanon and more. While this is a gloomy outlook for the geopolitical environment, it makes the Defense sector quite appealing as a safe haven investment in the conditions we are facing.
In case you are interested in buying these ETFs, you should consider their composition, as this is where they differ significantly.
For example, Boeing (earns about 35% of its top line revenues from military sales) makes 21% of ITAs portfolio and is by far the largest holding, followed by United Technologies (14% of its revenues were from military sales last quarter) with 17%.
Boeing’s current 737 struggles, tonight’s crash in Iran on top, should be taken into consideration.
In comparison, XAR’s top five accounts for just under 20% of total ETF assets and includes companies of very different sizes and focus points, the largest one being Northrop Grumman Corporation with 4.10% about This is a much purer play ETF as it aims to include companies with big chunks of their revenue coming from military sales to the US government. As a result, it is probably more likely to continue outperforming ITA in the near term.
Finally, we believe Bitcoin is shaping as a new alternative safe haven asset, currently trading at 8300 USD, up 20% since the killing of general Qasem Soleimani.
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