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JP Morgan: ‘Defense is a haven again,’ buy while global uncertainty persists

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JP Morgan: ‘Defense is a haven again,’ buy while global uncertainty persists

Buy aerospace and defense stocks amid global economic uncertainty and an ongoing trade war, J.P. Morgan said Thursday.

The firm put out its monthly “Balance of Power” report focusing on good entry points into the market amid a confusing macroeconomic landscape.

“Defense is a haven again,” said J.P. Morgan’s aerospace and defense analyst Seth Seifman. “Defense stocks have outperformed recently due in part to their relative immunity to macroeconomic risks, including China trade, falling interest rates, and currency fluctuation.”

Defense stocks have outperformed the broader markets despite trade war tensions, currency wars and unprecedented low interest rates globally. After stocks suffered their worst day of the year on Monday, defensive names like Huntington Ingalls, which is the largest military shipbuilding company in the country, have bounced back nearly 3%, while the S&P is up 0.22% since Monday.

Seifman said defense stocks are working better now because valuations are more reasonable right now, while valuations where “clearly stretched in early 2018.”

Stocks such as Spirit AeroSystems and Boeing are more attractive because markets have become more comfortable with their “fattish” budgets and deficit cutting isn’t a priority in Washington this year, Seifman said.

“We think some investors started focusing on Defense pensions during the 2018 selloff, heightening valuation concerns, and now there is a better understanding of how pension will be a source of cash...for some time,” said Seifman.

Huntington Ingalls is J.P. Morgan’s top pick after under performance earlier in the year.

“The stock has recovered from other earnings disappointments this year, and with the long-term outlook little changed, risk-reward looks attractive,” said Seifman.

J.P. Morgan also likes metals engineering and manufacturing company Arconic.

— with reporting from CNBC’s Michael Bloom.

 

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