U.S.-India Military Ties Put These Defense Stocks in Focus

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The recent signing of the long-awaited military agreement between the United States and India to strengthen the Indo-Pacific military system in order to offset any major influence of China could make the backdrop favorable for some U.S.-based defense equipment manufacturers.

The agreement not only allows the two nations to share sensitive military information and technologies, but also lets India buy technologically advanced American weaponry such as armed surveillance drones that will help the Southeast Asian nation monitor China's activity in the subcontinent.

The pact was signed last week in India's capital city New Delhi, where U.S. defense chief James Mattis and Secretary of State Mike Pompeo met their Indian counterparts to strengthen ties on the military and political fronts.

Features of the Agreement

The Communications Compatibility and Security Agreement between the United States and India gives the latter access to General Atomics' Sea Guardian armed surveillance drones manufactured in the United States. These would be helpful in keeping an eye over the Indian Ocean, an Indian territory that China has been trespassing in recent years.

China's operations close to the Indian borders have been a matter of concern for the Southeast Asian nation, as the former recently took over a port in Sri Lanka after the Sri Lankan government failed to pay off its debts to China. Beijing has also been operating submarines in the Indian Ocean and set up a naval base in Dijbouti, a small African country.

The agreement makes India one of the 30 nations that have agreed to align their military communication systems to America's. The two nations will also have a hotline between their foreign departments and hold joint military drills in 2019 that will involve the countries' army, navy and air force.

Opposing China and Pakistan

President Donald Trump's decision to put diplomatic pressure on two of India's neighbors and rivals has earned his government significant support in New Delhi.

Both the United States and India oppose the Chinese government's Belt and Road initiative. The initiative aims to build major infrastructure such as power plants, ports, highways, railways and pipelines in Europe, Asia and parts of Africa. The two countries see this initiative as a means for China to deepen its political influence on foreign nations.

Also, in a recent development, the United States cut off its foreign aid of $300 million to Pakistan, aimed at combating militant groups in the region. The move was welcomed by India, as Trump's move could lead Pakistan to stop its cross-border terrorism activities.

Why Defense Stocks Should be in Focus

The agreement should increase demand for defence equipment of American manufacturers, as India will be allowed to buy them.

After the news hit the market on Sep 6, shares of some American defense manufacturers that produce drones move higher. Shares of AeroVironment Inc. AVAV , Raytheon Company RTN , Kratos Defense and Security Solutions, Inc. KTOS , Lockheed Martin Corporation LMT and Northrop Grumman Corporation NOC have gained since then.

While AeroVironment's shares have gained 21.3% since Sep 6, shares of Kratos Defense and Security Solutions, Inc. and Northrop Grumman Corporation have added 6.8% and 2.5%, respectively.

Shares of Honeywell International HON went up too, since the software-industrial company makes engines that are used in General Atomics' drones.

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Lockheed Martin Corporation (LMT): Free Stock Analysis Report

Northrop Grumman Corporation (NOC): Free Stock Analysis Report

AeroVironment, Inc. (AVAV): Free Stock Analysis Report

Kratos Defense & Security Solutions, Inc. (KTOS): Free Stock Analysis Report

Honeywell International Inc. (HON): Free Stock Analysis Report

Raytheon Company (RTN): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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