The Russian invasion of Ukraine has spread fear amongst investors as the heavy sanctions imposed on the Russian economy could derail global economic growth. Moreover, skyrocketing oil and commodity prices might further fan the flames of inflation, which could force central banks to take more aggressive monetary policy tightening actions, jeopardising the global economic recovery process. However, despite the ongoing negative sentiment in the market, the nervous environment could still translate into profits for the military sector.

Defence stocks on the spotlight

In the days since the Russian invasion, defence stocks have witnessed a sharp increase in their respective valuations amid expectations of a worldwide increase in military spending. Furthermore, investors seem to be reassessing the role that defence plays in protecting peace and democracy, dialling back the Environmental Social and Governance (ESG) discount which has weighted on military companies shares over the past years.

In a big shift of policy, the German Chancellor Olaf Scholz vowed to pour more than $100 billion into the country’s military budget and increase the yearly defence contribution to 2% of the GDP. This could prompt more NATO members who do not currently meet the alliance’s 2% spending target, to increase their defence budgets. Therefore, companies responsible for the production of military technology and weapons are likely to experience a significant spike in demand.

A cushion against volatility

Military stocks are known for their ability to withstand and experience growth in periods of escalating geopolitical tensions. Moreover, the military is considered as an essential spending by governments around the globe, making the sector less susceptible to business cycle shifts. Therefore, those stocks can act as a means of portfolio diversification against the volatility experienced by the rest of the equity market.

Lockheed Martin: Steady long-term revenues

Lockheed Martin is the world’s largest defence company and the leading contractor for the F-35 Joint Strike Fighter program. The company is also responsible for developing NASA’s deep-space Orion spacecraft. Currently, the US and its allies have already ordered 3,100 F-35 expected to be delivered by 2035, making the company one of the best defence stocks for steady and long-term revenues.

Taking a technical look at Lockheed Martin shares, if the strong positive momentum in the price continues, the first line of resistance might be the all-time high at 479. On the contrary, if the recent upside subsides, initial support might be found at the 398 hurdle.

Northrop Grumman: High-profile defence contracts to catalyse growth

Northrop Grumman is the second-largest defence contractor in the US and one of the highest quality stocks in the industry. The company is currently developing the B-12 stealth bombers expected to replace the US air force bombing fleet and is also the contractor for the air force’s Ground Based Strategic Deterrent program, valued between $85 and $100 billion.

From a valuation perspective, the company is currently trading at a price-to-earnings ratio which is below its historic average, indicating that its share price may have still room to grow. Northrop Grumman’s diverse business segments make its stock a solid pick as global demand in all of its operating segments is expected to experience strong growth over the coming years due to the elevated threat environment.

European defence spending to drive BAE Systems revenues

BAE Systems is the largest UK defence contractor and a constituent of the FTSE 100, operating in a wide variety of industry’s segments. The company has recently completed the £150 million acquisition of Bohemia Interactive Simulations, which is expected to expand the company’s modelling and simulation capabilities to meet customer needs in the growing global military training market.

The weapons and aerospace maker is expected to witness a significant boost in revenues over 2022, driven by the increase in military spending of European countries such as France and Germany. Moreover, reports indicate that UK prime minister Boris Johnson is also anticipated to increase the country’s defence budget, acting as another major tailwind for the company.