FTSE 100: defence stocks BAE Systems and QinetiQ rise as Israel-Hamas war escalates

FTSE 100 investors may be concentrating on the oil majors BP and Shell, but that’s just one of many sectors being affected by the ongoing Israel-Hamas war. Defence stocks — including BAE Systems and QinetiQ — are rising, while the FTSE 350 Aerospace and Defence ETF is up by 2.5% over the past five days alone.

FTSE 100: Israel-Hamas updates

As an overview, tensions are still mounting. US President Biden will visit Israel tomorrow to hear the country’s plans for a ground offensive against Hamas, and to press Israel to ‘minimise civilian casualties.’

Meanwhile, Iran has made yet another warning — though this one is more concrete — cautioning it could take ‘pre-emptive action’ against Israel within the next few hours. This could involve an escalation of hostilities between Israel and Iranian-backed Hezbollah in Lebanon.

More than 1,300 people in Israel have been killed by Hamas since 7 October, while over 2,700 people have died in retaliatory Israeli strikes. And Reuters has reported that Israel Defence Forces’ Rear Admiral Daniel Hagari has called the status of the Gaza Strip after the planned assault a ‘global issue’ for discussion.

Meanwhile, Jordan’s King Abdullah II has warned that ‘the whole region is on the brink of falling into the abyss’ and further that the threat of the crisis expanding into regional warfare is ‘real.’ Critically, he has also warned against trying to ‘push’ Palestinian refugees into Jordan or Egypt, calling that a ‘red line.’

The situation on the ground remains dire in Gaza — food, water, fuel, and electricity are all running low, and this issue is being compounded by the movement of people from the north to the south under instructions from the Israeli military.

FTSE 100 defence stocks

There are five key FTSE defence sector shares being affected — BAE Systems, Rolls Royce, QinetiQ, Babcock International and Serco Group.

BAE Systems is perhaps the most popular UK defence sector stock, and is also the largest, with a circa £33 billion market capitalisation. The company derives most of its earnings from fighter jet programmes, including the Eurofighter Typhoon and F-35 Lightning, which it sells to states including the US, UK, and Saudi Arabia.

While Rolls-Royce is making headlines for yet more job cuts — and makes the lion’s share of revenue from civil aerospace — Rolls also has a resilient business in defence, making engines to be used in aircraft, military transport systems and navy vessels.

Then there’s QinetiQ, which has both military and civilian exposure but is different to many other FTSE defence stocks in that is it tech-focused, with products including advanced materials and robots.

Fourth, Babcock has a global diversified client base and specialises in constructing and decommissioning nuclear submarines and power plants. It also offers servicing for military vehicles, alongside general infrastructure maintenance and technical training.

Finally, there’s Serco — a bit of an all-rounder. The company provides public services across the defence sector, including operations and base management, ship modernisation, aircraft maintenance, and cyber security.

These companies are all seeing increased interest as defence spending continues to ramp up. Russia’s invasion of Ukraine and now the Israel-Hamas war have put defence back on top of the political agenda, and the FTSE 100 businesses could see significant new contracts come through soon.

For context, BAE Systems shares have risen from circa 600p just before the Ukraine War to 1,075p today. Two weeks ago, the FTSE 100 defence company won a £3.95 billion contract to build a new generation of submarines as part of the Aukus pact between the US, UK, and Australia to provide Australia with nuclear-powered attack submarines by the late 2030s.

The pact aims to counter China's ambitions in the Indo-Pacific region and Beijing has strongly criticised all three countries over the deal. And with Putin meeting his ‘dear friend’ Xi in China today, likely to discuss this new geopolitical twist, FTSE 100 defence stocks could continue to rise.

While de-escalation in the Middle East is still possible, Sino-US tensions continue to tighten. The US has just restricted sales of Nvidia chips to China to limit China's ‘access to advanced semiconductors that could fuel breakthroughs in AI.’

And in the background, Taiwan remains a long-time concern.