Iran Attack Could Be Game-Changer For Defense Stocks

In the latest evidence that bad news for everyone else can often be good news for military contractors, defense investors are perking up as rumors spread that Israel might attack Iran’s nuclear complex in the Autumn.

Any new Middle East war would give a boost to the stocks of military suppliers, while also making equities in other sectors look less attractive as broader markets responded to a likely spike in oil prices.

The rumors of an Israeli attack before the November elections are driven by several factors: reports of an acceleration in Iranian nuclear-weapons efforts, the comments of Republican presidential candidate Mitt Romney on his recent trip to the Jewish state, and a possibly portentous change in the lineup of Israeli security officials. The latter development saw replacement of Israel’s civil-defense chief with a member of the same commando unit in which Prime Minister Benjamin Netanyahu and Minister of Defense Ehud Barak served — with the outgoing civil-defense minister talking in unusually detailed terms about the country’s preparations for war with Iran.

Israeli officials have been concerned for many years about Iranian efforts to obtain nuclear weapons — efforts that have been accompanied by bellicose rhetoric out of Tehran about the need to wipe the Jewish state off the map. Mitt Romney added to the overcharged rhetorical climate when he told an audience in Israel that there is a “moral imperative” to assure the theocratic government of Iran did not obtain nuclear weapons. With Netanyahu’s government already skeptical about the prospect that economic sanctions would slow Iran’s nuclear development program, Romney’s remarks might have been interpreted as a green light for military action.

A new war in the Middle East is just about the last thing that the faltering global economy needs, accompanied as it likely would be by Iranian missile launches and action in the Strait of Hormuz. However, it would be a welcome relief for defense investors who fear that the narrative between now and the end of the year would be mainly about budget sequestration. All the talk of across-the-board cuts in military spending has driven down the prices of defense stocks, and the November election is shaping up to be a status-quo election that won’t change much, at least as far the Pentagon and its industrial colleagues are concerned.

A new war in and around Persian Gulf oil fields would completely alter the outlook for defense equities. Even if the U.S. weren’t drawn into the conflict, it would likely signal increased U.S. military activity and rising overseas demand for U.S. weapons. It also would ease the challenge of convincing a divided Congress to delay implementation of sequestration, which is currently scheduled to trigger on January 2. The two major U.S. political parties may not agree on much, but one place where they do is supporting Israel’s security needs.

Time magazine alluded to growing tensions in the region in an exclusive story on August 31 describing how U.S. officials were seeking to dissuade Israeli leaders from moving unilaterally against Iran’s nuclear complex. The story reported how plans for joint military exercises had been scaled back to avoid encouraging an attack. However, President Obama’s influence in the Israeli capital may not be sufficient to prevent early military action against a threat that leaders of the Jewish state view as threatening their country’s existence. Even the possibility of such a move has investors taking another look at the stocks of U.S. military contractors.

Loren Thompson, a member of the Breaking Defense Board of Contributors, is a defense consultant, an analyst at the Lexington Institute and author of the Early Warning blog.