Global share markets are back on the defensive as concerns over the Covid-19 crisis oscillate. Economic news flow still has the capacity to shock and it seems as if the world economy is set for a severe and possibly prolonged downturn. It’s natural share investors remain tetchy, but it doesn’t mean they should head for the hills. There remain plenty of FTSE 100 stocks that should still create big returns over the next decade, at least.
BAE Systems (LSE: BA) is one of these brilliant safe havens, in my opinion. Theoretically, defence spending by major nations could come crashing down as governments scramble to save cash. But in reality overall spending is likely to fall only by modest amounts (if at all) during the 2020s.
Global sales of defence products rose by the biggest amount in 10 years during 2019, data shows. Once again the US, a major buyer of Footsie-quoted BAE Systems’ wares, was the key driver behind the rise.
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The world is far less safe today that it’s been for decades and Western nations are spending heavily to counter increased military activity from China and Russia, addressing ongoing turbulence in the Middle East, and to protecting their citizens from terrorist activity.
The tension’s rising
If anything, the coronavirus outbreak has increased the tension between the superpowers, raising their perceived needs for weaponry. Rising stress always leads to fresh rounds of defence spending of course. The US and China, in particular, remain at loggerheads following President Trump’s first criticism of Beijing’s Covid-19 response weeks ago.
Indeed, in a possible sign of things to come, the White House this week launched an extraordinary broadside against China. In a report to Congress it criticised the country in extreme terms. It’s part of an escalating war of words between the two countries that suggests defence spending will stay robust even in a recession.
A true FTSE 100 bargain
It’s no surprise, against this backdrop, City brokers believe BAE Systems’ profits outlook remains healthy. Supply chain and manufacturing disruption, due to Covid-19-linked lockdowns, mean City brokers expect earnings here to drop 2% in 2020. It’s a development that would break a long record of sustained annual growth.
However, the FTSE 100 company is expected to come roaring back with a 13% profits rebound in 2021, analysts say. It seems investors needn’t be too concerned over BAE Systems’ earnings outlook during what promises to be a tough few years at least.
Still, its low forward price-to-earnings (P/E) ratio of around 11 times suggests the market is underestimating its obvious safe-haven qualities. The company offers some serious value, a point reinforced by its bulky dividend yield of 4.8% for 2020.
BAE Systems is a share which, irrespective of your personal attitude to risk, is a great share to buy today with the intention of holding for years to come.
