Aerospace & Defense

Weekly Economic Review – Risk Assets Continue to Stand Out


The global stock markets continuing the positive trend. US leading indicators rose 0.7% this week and ended a positive 7 out of 8 weeks led by technology. European indexes rose by 0.9% and signed at a peak of about 15 months. The average index of emerging bloc rose 4.3%, led by Russia and China.

The US interest rate, as expected, reached 1% (the upper limit of the target), with a majority of 9 to 1, almost unanimously agreeing that the improvement in economic conditions is consistent with the gradual process of raising the interest rate. That there will be two further increases this year, and by the end of 2018 the interest rate will rise to 2%.

Government bond markets were traded in slight increases. The yield on US government bonds went down from 2.57% to 2.5%. A similar trend was seen in Germany, the stability of the UK.

Economic indicators continue to be positive in real terms in most blocks of the world. Global Purchasing Managers Index J.P. Morgan continues its upward trend and indicates economic expansion (52.9 points), however, led by the US and the euro area. Good data released in the US in the field of industrial output, an increase of 0.5% (ongoing trend last half year) and positive trends in employment and real estate, sales. retail was in line with expectations and CPI rose a moderate 0.1% in relatively good data released in China. exports rose from 6% to 6.3%.

These days there are meetings of the G20 and the meeting between Merkel Trump. The tension between the United States all blocks of the world in the field of exchange rates.

The price of oil rose sharply by 0.6%. Index of commodity prices this week rose by 1%. Per ounce of gold rose 2% this week

The dollar was down 0.9% against a basket of currencies.

Trump’s budget proposal – “The winners and the losers”

The budgets of the State Department and the Ministry of the Environment are among those expected to absorb the deepest cuts and reflect President Trump’s different policies, with the aim of increasing defense spending.

The United States is the world’s largest defense exporter (about 40% of total global defense spending), according to the Trump government’s new budget proposal. Security spending is expected to grow by $ 54 billion in the coming year, a 10% increase over last year.

It is reasonable to assume that the administration’s expenses for this item will increase in the next two years. At the same time, the Trump administration is putting pressure on US allies, which will also increase their defense spending, and it is not inconceivable that we will see higher international defense spending that will support companies in the defense industry.

Among the most prominent “losers” are the State Department budgets, the Environmental Protection Agency budget, and the reduction of projects in the fields of agriculture, green energy, and federal research funding.

Accordingly, one of the sectors expected to benefit from the increase in the US defense budget, while also increasing the level of geopolitical tension in the world, is the aerospace & defense sub-sector.

The sector can be exposed through an ETF, such as Ishares USA Aerospace & Defense ETF (ITA). However, the pricing isn’t cheap, the sector’s shares are traded at an average P/E of 19.5%, higher than the average for the past five years (15.8%) and the S&P 500 (18.4%),

Conclusions

Global stock markets mostly embody the current pricing of “good news”, among others, against the background of economic viability and companies. However, the number of challenges currently facing in 2017, including: pricing is not cheap, uncertainty around policy trump, elections in the Netherlands, France and Germany, possible deterioration in the political situation in Italy and the return of the Greek debt crisis headlines.

This, combined with the effect of monetary tightening is expected in the US currency basket, the era of expansions in Japan and Europe, supported adopting a conservative approach

Consumer Discretionary (XLY)- In view of the increase in income disposable light of the planned reform of the individual income tax.

Energy (XLE) – In view of the removal of environmental regulation, and support activities Locally.

Finance (VFH, XLF, KBE) – In view of the credit growth, net interest income, operating expense structure and quality of credit portfolios that show consistent improvement. Easing regulation of the financial system, improving consumer sentiment, an expected reduction in corporate and income taxes, disposable income and the improvement in revenue funding as a result of the increase in interest rates, supports in investment in the financial sector to the near future.

Technology (QQQ, VGT, FDN) – In light of conflicting effects on the bottom line of corporate tax reduction, on the one hand, and increasing regulatory supervision of the sector, on the other.

MSCI Europe / S & P Europe 350 (hedged) – In view of the positive effect of the expansionary monetary policy of the ECB on the profits of multinational companies (HEDJ).

Germany (hedged) – In view of the increase in revenues of export-oriented light of the weakness of the euro against the dollar (DXGE).

UK (hedged) – In view of the interest rate cut and positive growth and postponement of exit from the block will benefit private spending of leisure (DXPS).

Nikkei2225 (hedged) – In view of the monetary and fiscal expansion parallel to support the weak currency profits of exporters (DXJ).


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