CITI: Even Obama’s defence Cuts Are Full Of Hot Air


Citi recommended defence stocks today on the basis that Obama’s budget cuts are overrated.

While the market is pricing in a perpetual decline in defence spending, analyst Jason Gursky says the DoD can cut $400 billion by 2023 by cutting spending growth and still growing in overall spending.

Moreover, history shows that defence spending takes longer and longer to wind down after a war.

The rest is just hype:

Over reaction to headlines is a common phenomenon and seemed to dominate last summer amidst an election campaign focused on fiscal hawks in the Tea Party and monthly negative headlines about F-35. Secretary Gates’ January announcements and the FY12 budget submission in February provided a relief rally across the space as defence budgets looked like they would be more robust than feared.

In our view, President Obama’s framework laying out a further $400 billion in savings by 2023 is an expected reality given the current political climate that sees each Party trying to out-cut the other while protecting programs dear to their constituencies, all while gearing up for Presidential campaign season. The forthcoming review of America’s global responsibilities will inform future cuts and could certainly impact American force structure and the way the country projects power. What we don’t expect, however, is the US to step completely away from being able to project said power.

Regardless of outcome, we expect the changes to come slowly. In our view, kneejerk reactions to political posturing are done without a thorough appreciation for the stickiness of defence spending and a lack of understanding of how Washington DC generates savings.

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