As I write today (2 October), the blue-chip FTSE 100 index is up just 0.24%. However, some Footsie stocks are doing better than this. For example, shares of defence giant BAE Systems (LSE: BA.) jumped 2.5%. This means the stock has increased almost 6% in just the first two days of October.
Elsewhere, Shell and BP rose by similar amounts today. However, unlike BAE, which has vaulted 17% year to date, these two oil stocks are still down by double digits in 2024.
The price of black gold has spiked
The reason for today’s rise is that the conflict between Israel and Hamas is now sadly erupting into a wider regional conflict. Iran launched missile strikes on Israel last night, while the Israeli military and Iran-backed Hezbollah are now reportedly fighting on the ground inside Lebanon.
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This significant escalation has rattled oil markets, raising concerns that a broadening conflict could disrupt vital Middle East oil supplies to global markets. Consequently, this has pushed up the price of oil and associated stocks.
Higher oil prices would obviously be beneficial to the top and bottom lines of Shell and BP.
A more dangerous world
When wars escalate and geopolitical tensions mount, this also tends to boost the share prices of defence contractors. With a market cap of £39bn, BAE Systems is among the largest defence stocks in Europe.
Beyond the Middle East, there’s also the ongoing war in Ukraine, while US-China relations are at their lowest point in decades. Given all this, nations across the world have been bolstering their defences.
We can see the impact this has had — and is excepted to have — on BAE’s revenue and earnings.
| Year | 2022 | 2023 | 2024 (forecast) | 2025 (forecast) |
|---|---|---|---|---|
| Total revenue | £21.25bn | £23.07bn | £28.22bn | £30.47bn |
| Net profit | £1.59bn | £1.85bn | £2.04bn | £2.28bn |
The company has a broad scope of offerings, with products ranging from submarines to ground vehicles. It operates across land, air, sea, space, and cyber, making it a key player in multiple defence sectors.
In the first half, its order backlog rose to a massive £74.1bn, up from £69.8bn the year before. The firm upped its payout by 11% last year and the dividend yield currently stands at 2.4%.
Looking ahead, one risk for BAE would be delays in product development due to a lack of available skilled workers. Also, manufacturing defects in any of its key products (e.g., fighter jets or submarines) could prove costly to fix and impact earnings.
Getting defensive in my own portfolio
I bought BAE Systems shares a couple of years ago at a much lower price. The increasingly fragmented world we’re living in and rising military spending were the main reasons.
However, another motivation for me was that I wanted defensive stocks like this to offer my portfolio a hedge against any geopolitical volatility.
As Charu Chanana, Head of FX Strategy at Saxo Bank, recently pointed out: “In an era where geopolitical shocks are a constant threat, positioning your portfolio for resilience isn’t just smart — it’s essential.”
While I love the whizzy tech stocks in my portfolio, shares like BAE prove their value in uncertain times like today.
