Tar Heel Business

The sustained U.S. military presence in Afghanistan and Iraq has cost thousands of lives and has worn the American public’s patience thin.   With President Obama now in office, it looks as if George Bush’s “war on terror” may be close to entering a new phase where many troops are withdrawn from the Middle East.

The prospect of this departure likely will keep defense company stocks depressed for an extended period of time as investors wait to get an indication of where future demand for military equipment will come from.

One market that could yield promising growth for the defense industry is developing countries.  Many developing countries have long relied on the U.S. Navy and other U.S. armed forces to protect them against foreign invasion.  The U.S. has acted as the world’s watchdog, but as developing countries are gaining economic strength they likely will want to augment their military strength to flex their newfound power.

Another development that supports this premise stems from the implications of a unipolar world shifting to one with many dimensions.  With the rise of new powers you can expect to see many new disputes and power grabs, as demonstrated by the intensifying border dispute between China and India.

As these countries vie to establish their place in the new world order, it will become necessary for them to bring their militaries into the twenty first century to put muscle behind their words.  Many developing countries still rely on weapons that were formerly donations from the U.S. or Russia during the Cold War.

This increase in demand for high tech weaponry should provide a boon to U.S. based defense contractors.  These companies are the world leaders in defense technology, thanks in part to the U.S.’s historical proclivity for a lofty defense budget.  It seems likely that many countries will come to these U.S. companies to meet their defense needs rather than trying to develop their own weapons because of the enormous research costs involved in creating new technology.

However, it is probable that some of the largest developing countries will attempt to produce their own military technology because of their mistrust of the U.S.  They will not want to rely on the U.S. to provide them with weapons because they may perceive this as a weakness, as they do not want the U.S. having specific knowledge of the state of their military.

The evidence seems to point to a rise in the demand for U.S. defense contractors in the coming future, and now could be the ideal time to buy these stocks at their troughs thanks to depressed valuations based on the impending U.S. withdrawal from the Middle East.

-Brian Stockton