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As I write today (October 2), blue-chip companies FTSE 100 The index has risen only 0.24%. However, some Footsie stocks are doing better. For example, shares of the defense giant BAE Systems (LSE: BA.) jumped 2.5%. This means the stock has risen almost 6% in the first two days of October alone.
Elsewhere, Shell and PA increased by similar amounts today. However, unlike BAE, which is up 17% so far this year, these two oil reserves will continue to decline by double digits in 2024.
The price of black gold has skyrocketed
The reason for today's increase is that the conflict between Israel and Hamas is sadly exploding into a broader regional conflict. Iran launched missile attacks on Israel last night, while the Israeli military and Iran-backed Hezbollah are now reportedly fighting on the ground inside Lebanon.
This major escalation has rattled oil markets, raising concerns that a widening conflict could disrupt vital Middle East oil supplies to global markets. Consequently, this has driven up the price of oil and associated stocks.
Higher oil prices would obviously be beneficial for Shell and BP's bottom lines.
A more dangerous world
When wars escalate and geopolitical tensions rise, this also tends to boost the stock prices of defense contractors. With a market capitalization of £39bn, BAE Systems is among Europe's largest defense stocks.
Beyond the Middle East, there is also the ongoing war in Ukraine, while relations between the United States and China are at their lowest point in decades. In the face of all this, nations around the world have been strengthening their defenses.
We can see the impact this has had (and is expected to have) on BAE's revenue and profits.
| Year | 2022 | 2023 | 2024 (forecast) | 2025 (forecast) |
|---|---|---|---|---|
| Total revenue | £21.25 billion | £23.07 billion | £28.22 billion | £30.47 billion |
| Net profit | £1.59 billion | £1.85 billion | £2.04 billion | £2.28 billion |
The company has a wide range of offerings, with products ranging from submarines to land vehicles. It operates on land, air, sea, space and cyber, making it a key player in multiple defense sectors.
In the first half, its order book rose to a whopping £74.1bn, up from £69.8bn a year earlier. The company increased its payout by 11% last year and the dividend yield currently stands at 2.4%.
Looking ahead, a risk for BAE would be delays in product development due to a lack of available skilled workers. Additionally, manufacturing defects in any of its key products (for example, fighter jets or submarines) could be costly to correct and affect profits.
Getting defensive in my own wallet
I bought BAE Systems shares a couple of years ago at a much lower price. The increasingly fragmented world we live in and increasing 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 noted: “In an era where geopolitical shocks are a constant threat, positioning your portfolio for resilience is not only smart – it's essential.”
While I love the brilliant tech stocks in my portfolio, stocks like BAE prove their worth in uncertain times like today.
