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• The geo-political conflicts in Ukraine and the Middle East have prompted NATO members to fulfil their commitments to invest 2% of their GDP in their own defence, and BAE Systems is set to benefit from a long-term increase in defence spending in Europe over the next few years.
• Defence manufacturers primarily serve government clients, ensuring steady sales and stable revenues. Contractual provisions that account for cost increases offer these companies protection against inflation. This resilience to rising prices has played a significant role in the industry’s exceptional performance compared to the overall stock market in the long run.
• Currently, Britain is spending 2.25% of its GDP on defence, which is set to increase to 2.5% by 2025, following Parliament’s approval of an additional £5 billion for the armed forces.
• In H1 2024, the combined revenue from the UK and Europe accounted for 40% of BAE’s total revenue, up from 33% in 2022. Analysts expect that the combined defence budgets of European NATO members will increase by 25%, amounting to around $400 billion annually.
• Under AUKUS partnership, the UK will co-design and build eight next-generation, nuclear-powered (but not nuclear-armed) submarines with Australia. BAE Systems, with its expertise in submarine design and construction, could play a significant role in providing support or technical assistance.