BAE Systems is on track for “a very good year” thanks to an escalation in geopolitical tensions, according to analysts.
Shares in the FTSE 100 stock inched up 7p, or 1.3pc, to a 10-month high of 526.5p after JPMorgan Cazenove hiked the stock’s rating to “overweight” - its second rating upgrade in just six days. In a bullish note on the defence sector, the investment bank said: “The world really does feel more dangerous as we enter 2016.”
Analysts believe the list of concerns has “grown significantly” in the last few months of 2015, as a result of three major terror attacks, which Islamic State claimed responsibility for, in the final quarter of last year, the power struggle between Saudi Arabia and Iran, and the refugee crisis.
In its wake, defence spending has increased in most parts of the world. David Perry, a JPMorgan analyst, said global defence spending rose 1.7pc in 2014 - the first year of growth since 2010. While data is not yet available, the bank believes it also rose last year, and will continue to rise in the next 12 months.
Last year, the UK, Germany, Italy and Sweden all announced higher defence spending budgets than previously expected. JPMorgan also believes the British government is “more supportive of defence” than it was in its first administration, when austerity was the focus. Sector wide, orders for European-built fighter jets have not been strong over the last decade. However, last year there were two orders for such planes. BAE Systems “will still be pursuing an order for Eurofighters from Saudi Arabia”, the bank added.
With jitters about global growth plaguing investors in recent times, Mr Perry said defence stocks are considered attractive due to their “safe haven status”. The rating revision comes days after RBC Capital Markets declared the defence giant its “top pick” in the European aerospace and defence sector, due to a higher-than-expected US defence budget - BAE’s largest end market.
Two months ago, the FTSE 100 company warned its 2015 earnings would see no growth, after it cut the rate of Typhoon aircraft production.
BAE Systems was among the top FTSE 100 risers after a rating upgrade. Photo: EPA
On the wider market, Britain’s benchmark index had another volatile trading session, swinging between gains of 0.5pc and losses of 0.69pc. Investors appeared to shrug off a sharp fall in China’s benchmark Shanghai stock market, which closed down 5.33pc, after China guided the yuan higher, following a torrid start to the new year. Nonetheless, the FTSE 100 closed down 40.61 points, or 0.69pc, to 5,871.83.
Jameel Ahmad, of Forex Time said: “European and US markets are trying to ignore another brutal round of punishment in the Chinese markets overnight, but it is unlikely that they will be able to maintain this.”
Although the blue chip index ended the day marginally lower, Standard Life ticked 0.4p higher to 363.4p, buoyed by a positive broker note. Deutsche Bank raised its rating as it believes Standard Life is one of the strongest life assurers in terms of future growth.
The bank’s view of the wider sector is somewhat more subdued. Oliver Steel, of Deutsche Bank, said the share prices of UK-listed life assurers are currently “wading through a morass of uncertainty” over the next few months, due to volatility in financial markets, UK pension reforms and fears of a Brexit. Meanwhile, shares in Prudential slipped 12.5p to £13.64 as the bank believes it faces the “greatest amount of uncertainty” due to slowing Asian growth.
Another stock enjoying the benefits of a rating upgrade was Whitbread. Shares rose 79p to £41.99 after Bank of America Merrill Lynch lifted it from “neutral” to “buy” as the bank believe Premier Inn continues to be “relatively resilient”.
On the other side, Sports Direct tumbled 7pc to 403p following a rating downgrade from Liberum. In the wake of Friday’s profit warning, the broker slashed its rating from “buy” to “hold”.
Irish drugmaker Shire spiralled downwards to the bottom of the FTSE 100 - 8.2pc lower at £39.25 - after it agreed to buy US rival Baxalta, a rare disease drug developer, for $32bn.
The price of brent crude crashed below the $32-a-barrel mark in intraday trade, dragging oil majors down also. Royal Dutch Shell B shares slipped 1.5pc to£13.55, while BG Group shed 2.4pc to 917.7p.
While Rebecca O’Keeffe, of Interactive Investor, warned there is “no end in sight for the beleaguered commodity”, some sectors may find support from “the positive consumer benefits from low energy prices”.
Despite dominating the FTSE leaders in early trade, mining stocks edged lower as the price of copper plunged to a six-and-a-half year low of $4,412. As concerns about waning demand from the world’s biggest metals consumer continued to intensify, international mining and trading group Glencore fell 5.2pc to 73.4p. Meanwhile, Antofagasta and Rio Tinto lost 2.7pc and 2.4pc, respectively. Anglo American bucked the trend to rise 0.5pc to 230.5p.
Elsewhere, gold attempted to cling on to gains made last week, when it touched a nine-week high, but failed. The price of gold slipped 0.7pc to $1,096 per ounce as the dollar rose against the euro. In its wake, Randgold Resources eased back - down 1.1pc to £43.51.
Finally, following a prolonged period of suspension, Management Resource Solutions resumed trading at 2.30pm after it announced the proposed acquisition of Bachmann Plant Hire for £6.5m. In just two hours of trading, shares jumped 41pc to 14.3p.
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