Defence budgets are a tricky thing. They are massive documents and involve input from hundreds of military personnel and politicians.
So while there is a lot that goes into them, the President of the United States’ foreign policy holds serious weight when it comes time to fund the Department of Defence.
In a note diving into the leading candidates possible impact on the defence budget, and by extension publicly traded defence contractors, RBC Capital Markets’ Robert Stallard said that the “certain uncertainty” of a Donald Trump presidency could lead to a huge shift in DoD spending.
“In fact, the more aggressive stance in both the Middle East and Far East arguably increase the chances of the US military becoming actively engaged in either region,” said a note from Stallard. “And as we saw with Iraq & Afghanistan, these overseas operations can add over $100 billion to the base DoD budget in any given year.”
In recent years, the Defence budget has been cut slightly though slight increases expected over the next few years.
Stallard said the status quo is likely to continue with Democratic candidate Hillary Clinton in office, but Trump’s “typically erratic” stance on foreign policy creates enough uncertainty to imagine a serious jump in spending.
Here’s a quick rundown of Trump’s positions that Stallard thinks could impact the DoD budget, and the bottom lines of contractors:
- The Wall: Stallard believes the border wall with Mexico would be good for concrete and some defence companies. “The exact details of this plan have not been laid out, but we would imagine that it would be a positive development for US concrete companies, and defence companies with exposure to homeland security and C4ISR,” he wrote.
- NATO and Russia. Trump’s anti-NATO stance would be bad for US contractors, but good for European-exposed defence companies since US bases in Europe would be likely to close. This would also embolden Vladimir Putin and Russia according to Stallard.
- Israel and the Middle East: Trump’s recent support of Israel and against the Iran deal would lead to more pro-Sunni alignment, said Stallard, opposing Russian and the Assad regime. “We think it fair to assume that this policy would increase the chances of US forces being actively engaged in the region, probably with boots on the ground,” he said.
- China: Trump’s strong words on Chinese trade deals and encouragement of Japan gaining nuclear capabilities opens up an increased chance of an Asian conflict. “We can’t imagine that China is going to welcome such developments, and this would significantly increase tensions in the region, with a consequently higher chance of a military confrontation,” wrote Stallard.
Put all of these stances together and Stallard sees the increased chances of an armed conflict, and thus a spike in military spending.
“We’ve not seen anything that points to a cut in US defence spending under Trump, and his views on some foreign countries would suggest that there is an increased chance of the US military being deployed somewhere,” wrote Stallard.
While Stallard did caution that the President does not have total control to set a Defence budget, it appears much more likely that a President Trump would lead to a spike in spending than any other candidate.
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