BAE Systems, Rolls-Royce to benefit as geopolitical risks rise

on Oct 9, 2023
  • BAE Systems and Rolls-Royce are the two biggest defence contractors in the FTSE 100 index.
  • The two defence companies could benefit from the ongoing war in Ukraine.
  • A new war in Israel started during the weekend and could go on for a while.

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BAE Systems (LON: BA.) and Rolls-Royce Holdings (LON: RR.) share prices could benefit as the Israel-Palestine takes shape. BA stock jumped by more than 5% on Monday to a high of 1,028p, 109% above the lowest level in 2022. Similarly, Rolls-Royce shares have jumped by over 220% from the lowest point in 220.

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Israel-Hamas war

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BAE Systems and Rolls-Royce Holdings could be key beneficiaries as risks in the global economy rise. The most recent risk was the new conflict in the Middle East, which started after Hamas invaded Israel. In the aftermath, Israel declared war on Hamas.

While many Western countries have supported Israel, many in the Middle East, including Iran and Saudi Arabia are supporting Palestine. The challenge with this situation is that this will not be a short war. Some analysts believe that it could go on for months.

The war in the Middle East is happening at a time when the Russia and Ukraine war is going on. And while Ukraine’s counter-offensive is struggling, analysts believe that it will go on for months or years.

Meanwhile, tensions between the US and China are still elevated and could get out of hand soon. Many experts believe that China will invade Taiwan in the coming years. Officials will likely make that decision after observing how the Ukrainian situation evolves.

The bottom line of all this is that the world is not expected to be a safe place for quite some time. This situation will pit Western countries against the new axis of power that includes China, Russia, Iran, and North Korea.

BAE Systems and Rolls-Royce to benefit

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Defence contractors will be the key beneficiaries of this power struggle as companies boost their spending. The US is now spending over $820 billion in the industry every year. The same is true for countries like Australia and Europe. 

For example, the US, UK, and Australia have created AUKUS, a new partnership that will see Australia develop its nuclear submarines. BAE Systems won a 3.75 billion pound contract to build products for AUKUS.

BAE Systems and Rolls-Royce Holdings are the two biggest defence contractors in the FTSE 100. While Rolls-Royce makes most of its money in civil aviation, its defence business provides it with the most reliable income. 

The most recent results showed that Rolls-Royce made 1.9 billion pounds in revenue in the first half of the financial year. BAE Systems, on the other hand, is a major player in defence. It has secured 21.1 billion pounds in orders in the first half of the year, bringing the backlog to over 66.2 billion pounds. 

The challenge for BAE Systems and Rolls-Royce holdings is their capacity. The two companies, especially BAE will need to boost their capacity in the next few years. Further, there is the challenge of inflation as the cost of doing business rise.

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