FTSE 100 takes cue from Friday’s US gains, orders continue to flow at BAE Systems and Royal Mail owner fined

“The FTSE 100 made strong progress on Monday morning, following on from gains on Wall Street on Friday,” says AJ Bell Investment Director Russ Mould.

“An easing in government bond yields supported the biggest one-day gain in the Nasdaq Composite index since May as investors remained confident in the idea of interest rates having peaked despite an attempt by Federal Reserve chair Jerome Powell to counter this narrative last week.

“US inflation numbers out tomorrow will tell their own story and a higher-than-expected reading could well prompt renewed jitters among investors.

“Also helping the positive mood were strong updates from UK property investor British Land, which also boosted its peer Land Securities, and insurance outfit Phoenix surged higher after lifting its cash generation target.”

Bae Systems

“Greater geopolitical instability continues to drive orders for defence outfit BAE Systems, whose shares are up more than 80% since the Russian invasion of Ukraine in February 2022.

“With the emergence of a new conflict in Gaza, global governments are facing ever greater pressure to invest in their defence capabilities at a level which they probably haven’t faced since the end of the Cold War. New initiatives like the joint Aukus submarine project, on which BAE has a meaningful position, are reflective of this situation.

“The encouraging thing for BAE and its shareholders is that the contracts it is winning tend to be long term in nature and, as a result, the company has good visibility on revenue, earnings and cash flow over several years.

“The muted share price response to today’s trading update may reflect some disappointment at a lack of further upgrades after the company’s boost to guidance at the half year stage in August.

“The acquisition of space-focused Ball Aerospace remains on track for completion in the first half of 2024 – which reflects on management given the regulatory hurdles involved in concluding deals in this space.

“There was no further news on capital returns – BAE has already acknowledged buybacks will slow given it has completed a large part of the £1.5 billion programme slated to run until the end of the first half of 2025.”

International Distributions Services (Royal Mail)

“Royal Mail has paid the price for not having an efficient service. A £5.6 million fine by Ofcom is the latest embarrassment for owner International Distributions Services, which has repeatedly come under fire from the public and politicians for providing a sub-par service.

“Ofcom’s fine relates to the company’s failure in meeting first and second-class delivery targets. This isn’t simply a business dragging its feet, it is effectively confirmation that Royal Mail cannot do its job properly.

“Its errors are having a damaging impact on people’s lives, from delayed hospital letters leading to missed appointments to companies not being able to get their products to customers and then leading to lost business. Citizens Advice said nearly one in three people in the UK experienced letter delays in May, which is shocking.

“Last week Royal Mail lost its 360-year monopoly on delivering parcels from Post Office branches as rivals Evri and DPD were added as alternative options for customers. This is the latest in a string of setbacks for the business as competition intensifies and consumers and businesses vote with their feet, realising they don’t have to stick with Royal Mail.

“Improving service levels is crucial if International Distributions Services wants to stand a chance of returning Royal Mail to profitability.

“For years the business has been dogged by strike action as workers pushed back on working conditions and efforts to automate large parts of the business. While a new pay and conditions deal was accepted in the summer, Royal Mail is still eager to stop delivering letters on a Saturday and to make operations more efficient.

“The group seems to be in a constant state of flux and while its overseas parcel arm GLS is taking one step forward, this always seems to be offset by Royal Mail taking one step back.”

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