The share price of BAE Systems is knocking on all-time highs again, in line with our view from over a year ago that defence names would be getting attention on the back of the Russian war on Ukraine. In a blog just after the Russian invasion, James Chu, our Head of Investment Solutions, made the case for ESG funds reconsidering how they look at defence names. James also noted in a LinkedIn post that our ‘Weekly Talking Points’ for 07 March 2022 pointed out that BAE Systems had just made new all-time highs but could extend the gains, and that Rolls-Royce and Babcock were trading softly, but could regain lost ground.
The chart below shows the updated reindexed chart from that publication. BAE Systems did continue to rally, and Rolls-Royce and Babcock are recovering some lost ground. So far, so good as far as our recovery view is concerned.
But investor sentiment is a fickle thing, which is why we look at charts as a way to try and guess at what is going on. The chart below shows the weekly plot of BAE Systems. The recent high at 1,037p from 26 April 2023 has been approached again, but not broken. Double top risk? Sure. Which makes 883p (10 July low) important support now as a potential midpoint. More likely though, given the trend, is that new highs will be seen and gains towards 1,700p and higher could follow in time (extension measure from the break above the falling red line). In other words, defence spending looks likely to continue to build, and BAE draws investor flow. RR and BAB look likely to continue to regain ground as well.
We are not fans of ‘forever wars’ scenarios and Eisenhower’s concerns about the ‘military-industrial complex’ are always worth keeping in mind. However, Russia’s attack on Ukraine has concentrated minds and government spending looks likely to bolster order books, and share prices of UK defence firms.
Gerry Celaya
Chief Strategist