Is Defence Stocks the Most Reliable Option Now? | A Reflection
As-salamu alaykum! September was expected to be a tough month for the stock markets with talks of a possible crash. People were worried because the hype around artificial intelligence was pushing valuations really high, and US tariffs were causing fears of a recession.
But surprisingly, the S&P 500 had its best September in ten years, rising 4.25% to finish at 6,688.46 points. The Nasdaq, which focuses more on tech, jumped 6.49%. Japan’s Nikkei 225 also went up by 5.65%, and stock markets in London and Europe ended positively.
Still, many investors feel uneasy, especially this time of year when history reminds us of past crashes like in 1929 and 1987. People wonder if this 16-month bull run will finally end soon.
There are reasons to be cautious. The Shiller P/E ratio, which compares stock prices to average earnings over 10 years, recently hit 40.11, much higher than its average of 17.28. This usually means stocks are expensive and returns might be lower in the future. The S&P 500 has only gone above 30 twice before.
This time, worries about a bubble focus on AI, especially after Nvidia’s $100 billion investment in OpenAI, which some see as excessive, reminding us of the AOL-Time Warner merger before the dot-com crash.
Trade tariffs continue to affect global markets. Governments in the West face challenges controlling spending and deficits. On top of that, the recent US government shutdown threatens many jobs and billions in lost productivity.
Some experts say September’s market rise was driven by hopes for big interest rate cuts from the US Federal Reserve. But since inflation is still above the 2% target, the risk of a sharp market drop remains high.
Markets are trying to find balance despite recent gains. US tech stocks seem overpriced, gold looks a bit overbought, and government bonds face currency risks.
However, some believe today’s tech giants are more stable and profitable than during past bubbles. Yet, there's concern about too much market concentration - just ten companies make up about 40% of the US market, which itself is 72% of global markets. Many think they're diversified but might actually have overlapping risks.
One bright spot is defence stocks. With rising tensions from Ukraine to the Middle East, many governments are increasing their military budgets, and investors are noticing.
Europe is entering a 'structural rearmament cycle' with NATO boosting defence spending targets and countries like Germany lifting limits on defence budgets, unlocking billions in contracts.
This has led to big gains in defence companies. In Germany, Rheinmetall’s shares have more than doubled this year due to orders for tanks and air defence, while Hensoldt secured €1.4 billion in contracts recently. Italy’s Leonardo has also doubled thanks to its involvement with fighter jet programs.
Similar stories are happening in the US, with companies like Lockheed Martin winning huge missile contracts and Airbus reporting record defence and space orders.
These government-backed contracts offer steady income that isn’t too affected by economic downturns. While prices are high after this run, defence stocks offer both growth and strategic stability in an uncertain world.
Defence companies also benefit from links to the growing space industry, which is advancing thanks to private innovation in satellite communication and space exploration. This mix of defence, automation, and AI technologies offers a promising investment theme.
Still, prices are getting high, so investors need to choose carefully.
Other experts warn that although defence stocks have soared, their valuations are quite steep, so future earnings need to justify current prices.
Other safe options like gold and US Treasuries are still relevant. Gold keeps hitting new highs but can be volatile, while US government bonds offer returns above inflation.
Some believe we might be on the verge of a new bull market led by AI innovations. For those wanting to diversify beyond tech, healthcare and infrastructure sectors seem more resilient. People keep needing healthcare regardless of the economy, and infrastructure projects often have long-term, inflation-linked contracts, making them defensive investments.
Gold might keep shining too since it’s still under-owned by private investors and central banks hold only a fraction of their reserves in gold compared to history.
Even with strong order books, defence stocks come with risks. They may not be the only safe place, but in these fragile times with rising global tensions, they have significant strength. It might be wise to consider buying if prices dip.
May Allah bless us with wisdom in our investments and protect us from harm.
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