The many billions that have been shifting into government defence budgets may reflect a tragically unstable world but they’ve been a boon for BAE Systems (LSE: BA.) shares. The FTSE 100 defence stock – and Europe’s largest with a market cap of £62bn – has surged four times in value since 2021.
Then, on 8 January, the ‘leader of the free world’ President Trump said something that might make all of that pale into insignificance. And it might be a reason the BAE Systems share price has only started its ascent.
‘Dream military’
So what did the famously vocal chap say then?
In calling for defence spending to rise to $1.5trn, the Don posted on social media: “This will allow us to build the ‘Dream Military’ that we have long been entitled to and, more importantly, that will keep us SAFE and SECURE, regardless of foe.”
On the one hand, this is simply the way the wind is blowing. You’d be hard-pressed to find a Western government that isn’t making similar moves. And with China doing drills around the island of Taiwan and the awful war in Ukraine nearly into its fifth year, it shouldn’t come as too large a surprise.
But the reason this could be so impactful for BAE Systems is the company’s concentration across the pond. Around 50% of revenue is drawn from the US market. If another half a trillion is going to be spent then the share price could feel the benefit. BAE Systems was the FTSE 100’s top riser on the day of the announcement, jumping around 6%.
One obvious issue is that President Trump has a habit of saying rather outlandish things without following through on them. Wasn’t there a wall that was going to be built nearly a decade ago? The recent announcement might be followed up on just as much as the promised border security with Mexico was.
One direction
While the world has been heading in one direction of late, there are signs a reversal might be on the cards. A number of conflicts have eased or stopped around the globe. Who knows? In a few years, we can but hope that we might all be looking at this as a temporary and unsavoury blip in geopolitics.
And this brings us to one of the paradoxes of investing in a defence stock like BAE Systems shares. Simply: the share price does better when governments are more in need of its products. I wouldn’t blame anyone for not wanting to invest here from an ethical perspective.
Still, the signs are that multi-government spending will continue rising. While I’d take a lot of Trump’s words with a pinch of salt, the amount he’s proposing (as a percentage) is similar to what the decision-makers in many European countries have been suggesting. I can see BAE Systems being taken along for the ride too. One to consider, I’d say.
