State Street SPDR ETFs: Defence and infrastructure drive growth in industrials

State Street SPDR ETFs: Defence and infrastructure drive growth in industrials

April 19, 2024

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Spending on defence systems is rising rapidly under pressure from the continuing Russia-Ukraine War. Infrastructure is another key driver of demand.

‘For the second quarter of 2024, the European and US Industrials sectors are favourites, because of the structural growth drivers from defence and infrastructure,’ comments State Street SPDR ETFs today. ‘This quarter could also see a cyclical tailwind feeding through corporate cap ex. The sector contains a large number of companies and has shown a broad uplift in recent months.

Spending on defence systems is rising rapidly under pressure from the continuing Russia-Ukraine War. Many countries are providing Ukraine with weapons and ammunition, driving up their procurement orders as well as increasing the protection of their own borders. As a result, US and European defence budgets continue to rise. Within NATO, there is a spending target for each country, equivalent to 2% of its GDP. Most members are still short. The pressure to increase spending is likely to rise as global threat levels increase.

Aerospace and defence providers constitute approximately 18% by market capitalisation weight of the World sector and 21% in Europe. These stocks ranked at the top of Q1 performers for the sector, led by Rheinmetall, best known for its tank production. This was followed closely by Japanese integrated defence and space systems supplier Mitsubishi Heavy Industry and US aircraft engines supplier General Electric.’

We all want better infrastructure

‘Investment in infrastructure is another key driver of demand for the sector’s goods and services. Governments’ fiscal spending is a significant part of the build. Three bills passed under the Biden administration (the Infrastructure Investment and Jobs Act, the CHIPS Act, and the Inflation Reduction Act) create a total spend of $ 3-4 trillion. This is already stimulating demand for building products, construction, machinery, and transport networks for new projects. We believe this could benefit US-based stocks right through the sector, starting with some of the largest companies, like Caterpillar.

Meanwhile in Europe, the commitment to clean energy transition and the ambitious Green Deal provides a similar long-term boost. European Commission grants and tax credits should raise demand for suppliers for retrofitting projects, renewable energy production facilities such as wind turbines and solar power systems, and green infrastructure such as electric vehicle charging. Siemens and Schneider Electric are good examples of companies that should benefit from the decarbonization policy.

The Industrials sector is also a vector for the increasing adoption of AI technology within robotics, the Internet of Things, and machine learning-powered analytics. Such technological catalysts are already widely seen in process improvements in manufacturing and optimised distribution for logistics. In an effort to increase productivity and efficiency, corporations across all sectors will continue to include automation and improvements to their supply chains high up the agenda.’

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