Must read: BAE Systems and UK inflation 

BAE SYSTEMS 

Richard Hunter, Head of Markets, interactive investor says, “It is an unfortunate sign of the times that defence stocks are squarely back in fashion, as governments around the world look to protect their interests and lands from growing geopolitical tensions.

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Reminders of brittle relationships are seemingly never far away, ranging from potential and actual conflicts in the likes of Venezuela, between China and Japan and Russia and Ukraine. The backdrop has led to a number of governments pledging a higher percentage of GDP to defence spending over the next decade, which in turn means that opportunities remain within the burgeoning defence sector.

BAE Systems (LSE:BA.) is well placed given the diversity of its operation by both business lines and geography. Its Electronics System unit, which includes Space and Mission systems and was boosted by the previous £4.4 billion purchase of Ball Aerospace, accounts for 31% of revenues.

Aircraft products are responsible for 30% of sales, Maritime Equipment 15% and Platforms & Services, which includes vehicles and ammunition 14%, while by geography the US and UK account for 48% and 27% respectively.

The full year results will follow an impressive third quarter update in November, where BAE reported orders of £27.2 billion in the 10 months to October, up from £25 billion the previous year, including orders from Turkey worth £4 billion for 20 new Typhoon fighter jets, $3.3 billion worth of electronic systems and $1.7 billion for US combat vehicles.

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The group also maintained its previously raised guidance of annual sales growth of up to 10% and annual adjusted profit higher by 11% for the year as a whole. Even after the upcoming results, over the coming months there will be more scrutiny over revenues, profits and, equally crucially, the strength of forward order books.

Over the last year, the shares have risen by 63%, and by 126% over the last three years. Of course, with punchier valuations come higher expectations and more pressure to keep growing earnings to stay in line. A smaller focus will also be on dividends, where despite a pedestrian yield of 1.8%, the payment has been increased for more than 20 consecutive years.”

UK INFLATION 

Victoria Scholar, Head of Investment, interactive investor says, “It is a busy week for UK economic data with ONS unemployment, inflation and retail sales data released on Tuesday, Wednesday and Friday respectively. S&P Global services and manufacturing flash PMI data for February is also due on Friday. 

After inflation accelerated in December for the first time since July, hitting 3.4% it is anticipated to ease next week with January’s CPI likely to fall to around 3%. 

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The sluggish economic backdrop and a cooling labour market (especially wage growth), several measures announced in the Budget and base effects from last April when there was a bump in inflation due to energy prices, are all contributing to an easing inflationary picture. Although month-to-month inflation can be bumpy, these factors are expected to allow inflation to return to the Bank of England’s 2% target by Q2 2026 and probably remain around that level. 

The Bank of England (BoE) will be paying close attention to next week’s data which will help inform its upcoming rate decisions. After this week's disappointing UK GDP figures, February’s tighter-than-expected BoE vote split and an implied dovish tilt from the Monetary Policy Committee, it looks like the central bank could push forward with another 25-basis point rate cut potentially as soon as March.”