Defence has been back in the headlines this week as presidential candidate Donald Trump has insisted that Taiwan should pay the US for protection.
It’s a story which impacts the chip-making sector as much as it does defence companies. The US has long acted as the de facto guarantor of Taiwan’s security, as the island nation has a raft of impressive semiconductor companies that the US doesn’t want to see fall to China.
The entire US semiconductor market stumbled following Trump’s declaration.
The defence sector meanwhile continues to bask in the grim glory of an increasingly unstable world. Taiwan is already one of the biggest markets for international defence companies. Heightened security concerns caused by a Trump government aren’t going to detract from the possible business case there.
It’s been a funny few years for defence investors.
Before Covid, these were seen as sin stocks - companies that shouldn’t be profiting from warfare. In 2019, BAE Systems' (LON:BA.) shares crashed after the murder of journalist Jamal Khashoggi, amid fears of a global clampdown on arms dealing with Saudi Arabia.
Fast forward five years and defence companies are being seen as the protectors rather than the big bad war machines. Their share prices have not only benefited from the burgeoning order books, but also the shift in investor sentiment.
But what comes next?
This week we ran our first stock analysis workshop - a new format we are trialling which aims to answer specific questions about stocks selected by our audience (you can watch the replay here).
We asked attendees to vote on which stocks they would like us to cover and I was slightly surprised that far and away the most popular choice was BAE Systems, followed not too far behind by Rolls-Royce Holdings (LON:RR.) .
The aerospace and defence giant was the best performer in the FTSE last year. And in 2024, the shares have kept climbing, supported by a solid operating performance and improvements in profitability, as cost cutting measures made during the pandemic bear fruit.
Thus, many investors have found themselves sitting on substantial gains. Gains that have become increasingly tempting to cash in.
But, as we discussed in last night’s session, it’s important to ponder the fundamental investment case when making selling decisions and not just being tempted by the paper gains on offer.
For now, the fundamental investment case at…
