Matein Khalid
Investor | Family Office CIO | Portfolio Strategist | Board Advisor | VC | Finance Professor
Russia’s terror bombing of Kiev, Lviv and Odessa significantly escalates the geopolitical stakes in the Ukraine war. This tragic slaughter in the killing fields of Europe must stop if the human race has a shred of civilized DNA left in it. The bomb explosion on the Kerch bridge in Crimea and Russian battlefield defeats in Ukraine have shocked the Kremlin and Putin has retaliated with a merciless assault on Kiev.
China has also escalated its threats against Taiwan and Baby Kim’s intercontinental ballistic tests are existential threats against Japan, South Korea and the US. In the Middle East, Iran and its proxy militias continue their reign of terror. Civil wars/insurgencies and bush wars afflict Africa. India and Pakistan have still not resolved their bitter contest over Kashmir. The South China Sea and the Indian Ocean are the epicenter of a new naval Great Game.
So it is no coincidence that US defense stocks have outperformed the S&P index in 2022 by 25 to 30%. I believe the world’s rising geopolitical risk premium will anchor the valuations of defense shares and a Republican victory in the midterm elections will greatly increase the odds of higher US military spending next year.
When the world’s dictators wage war, the global arms bazaar mints money. Defense stocks are also uncorrelated to inflation and actually have proven a great anti-inflation hedge in past cycles during the Cold War. History will not repeat but it will surely rhyme in 2023.
Raytheon (RTX) is the world’s top hypersonic and electronic aerial warfare vendor to the US AF and its allies. Its patriot missiles protect the kingdom and the GCC states from Iranian/Houthi missile strikes. RTX is down 3.5% in a year where the risk-off bloodbath has taken the S&P 500 index down 23%. A company that builds the next generation of cruise missiles that can travel at 5 times the speed of sound makes America invincible against any tinpot dictator who dares to challenge Uncle Sam, as Saddam and Gaddafi once did and ended in Trotsky’s dustbin of history where they happily reside.
Boeing (BA) derives almost 50% of its revenues from its highly profitable defense business and its products include, Apache/Chinook helicopters, AWACS, B-52 bombers, C-17 Globemaster transport planes, F/A-18 Super Hornets, KC-46 Pegasus air tanker, F-15 Eagle fighter bombers etc. Boeing and Airbus run a de facto duopoly on twin aisle commercial jets at a time global airlines will be upgrading their fleets. The 737-Max tragedies in Ethiopia/Indonesia gutted BA, which has lost more than 50% since its pandemic high. I can see some profitable options trade now on Boeing. Time to sell 0.6 delta puts on BA or is this puppy going to get even cheaper as the world economy contracts in 2023?
Also published on Medium.
