The defence sector has, historically speaking, proven to be a popular safe haven for times of extreme geopolitical and macroeconomic instability such as these.
While arms giant BAE Systems (LSE: BA) may have lifted off in the immediate aftermath of June’s Brexit vote, the firm has failed to make significant inroads since then. But there are still plenty of political and economic fears stretching from London to Beijing that could prompt fresh waves of buying, at least in my opinion.
And I think BAE Systems’ valuations are certainly supportive of further share price rises. Lumpy contract timings are expected to cause a 3% earnings decline in 2016. But this still leaves BAE Systems dealing on a P/E rating of 14.1 times, sitting comfortably below the FTSE 100 forward average of 15 times.
And a predicted 9% bottom-line bounce-back in 2017 nudges the earnings multiple to a meagre 13 times.
Meanwhile, BAE Systems surpasses its big-cap rivals in the dividend stakes too — yields of 3.9% and 4% for 2016 and 2017 respectively nudge above the Footsie’s prospective 3.5% yield.
BAE Systems announced last month that, in the US, “the defence market outlook remains positive and the production ramp-up on a number of the group’s long-term programmes is progressing to plan.”
Looking closer to home, the company also announced it was making “good progress” regarding the implementation of the UK’s Strategic Defence and Security Review. And recent discussions with existing, and possibly new, customers have led BAE Systems to be confident of additional Typhoon contracts, it added.
The world is certainly not getting any safer, as Western powers grapple with rising and evolving terrorism action the world over, not to mention holding their heads over recent expansionist rhetoric from the likes of Russia and China.
Against this backcloth, I fully expect demand for BAE Systems’ hi-tech hardware to keep on rising.
Ring up great returns
Like BAE Systems, I reckon BT Group (LSE: BT-A) also offers rich investment potential at knock-down prices.
Concerns over difficult economic conditions this year and beyond have seen the telecoms titan’s stock value erode almost a fifth since June’s EU referendum, and the stock was last dealing at 31-month troughs of around 360p.
But I believe the risks facing BT may be baked in at current prices. A 10% earnings drop in the year to March 2017 is hardly ideal, but this still creates a P/E ratio of just 12 times. And an estimated 7% rebound in fiscal 2018 drives the multiple to a mere 11.3 times. And recent share value weakness creates bumper dividend yields of 4.3% and 4.7%.
I reckon the growing popularity of BT’s quad-play packages — helped in no small part by the recent acquisition of mobile giant EE — should keep the wolves from the company’s door and enable it to ride out the worst of any troubles affecting the UK economy.
