As I write in the present day (2 October), the blue-chip FTSE 100 index is up simply 0.24%. Nevertheless, some Footsie shares are doing higher than this. For instance, shares of defence big BAE Methods (LSE: BA.) jumped 2.5%. This implies the inventory has elevated nearly 6% in simply the primary two days of October.

Elsewhere, Shell and BP rose by related quantities in the present day. Nevertheless, not like BAE, which has vaulted 17% 12 months to this point, these two oil shares are nonetheless down by double digits in 2024.

The price of black gold has spiked

The explanation for in the present day’s rise is that the battle between Israel and Hamas is now sadly erupting right into a wider regional battle. Iran launched missile strikes on Israel final night time, whereas the Israeli navy and Iran-backed Hezbollah are actually reportedly combating on the bottom inside Lebanon.

This vital escalation has rattled oil markets, elevating issues {that a} broadening battle may disrupt very important Center East oil provides to international markets. Consequently, this has pushed up the price of oil and related shares.

Increased oil costs would clearly be helpful to the highest and backside traces of Shell and BP.

A extra harmful world

When wars escalate and geopolitical tensions mount, this additionally tends to spice up the share costs of defence contractors. With a market cap of £39bn, BAE Methods is among the many largest defence shares in Europe.

Past the Center East, there’s additionally the continuing conflict in Ukraine, whereas US-China relations are at their lowest level in many years. Given all this, nations the world over have been bolstering their defences.

We will see the influence this has had — and is excepted to have — on BAE’s income and earnings.

The corporate has a broad scope of choices, with merchandise starting from submarines to floor autos. It operates throughout land, air, sea, house, and cyber, making it a key participant in a number of defence sectors.

Within the first half, its order backlog rose to an enormous £74.1bn, up from £69.8bn the 12 months earlier than. The agency upped its payout by 11% final 12 months and the dividend yield presently stands at 2.4%.

Trying forward, one danger for BAE could be delays in product growth on account of a scarcity of accessible expert employees. Additionally, manufacturing defects in any of its key merchandise (e.g., fighter jets or submarines) may show expensive to repair and influence earnings.

Getting defensive in my very own portfolio

I purchased BAE Methods shares a few years in the past at a a lot decrease price. The more and more fragmented world we’re dwelling in and rising navy spending have been the primary causes.

Nevertheless, one other motivation for me was that I wished defensive shares like this to supply my portfolio a hedge towards any geopolitical volatility.

As Charu Chanana, Head of FX Technique at Saxo Financial institution, not too long ago identified: “In an era where geopolitical shocks are a constant threat, positioning your portfolio for resilience isn’t just smart — it’s essential.”

Whereas I really like the whizzy tech shares in my portfolio, shares like BAE show their worth in unsure instances like in the present day.