BAE Systems takes £2bn hit over fears of Musk’s efficiency drive

Britain’s biggest listed defence company took a £2 billion hit from investor fears that Elon Musk’s government efficiency drive will cause America to rein in military spending.
Shares of BAE Systems suffered the steepest decline on the FTSE 100 on Friday after analysts at the Bank of America warned of “growing uncertainty” over the fallout from the programme, which is targeting “at least” $2 trillion in federal spending cuts.
Musk, the billionaire boss of Tesla, has been made an adviser in president-elect Donald Trump’s government with a mandate to “dismantle government bureaucracy, slash excess regulations, cut wasteful expenditure, and restructure federal agencies”.
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Bank of America analysts, led by Benjamin Heelan, said that the rollback could lead to “contract changes” for BAE Systems, which derives about 40 per cent of its revenues from the US, worth £10.7 billion.
“We believe the focus on budget efficiency adds uncertainty which could weigh on valuation,” the analysts said. They downgraded BAE from “neutral” to “underperform”, typically the second lowest rating before “sell”.
Shares in BAE, which have been among the strongest performers on London’s blue-chip index this year amid heightened geopolitical tensions, retreated 4.9 per cent, or 63p, to £12.27, wiping about £2 billion from the £37 billion market valuation.
QinetiQ Group, a FTSE 250 defence contractor, was also downgraded by the analysts at Bank of America, the US’s second biggest bank. “While we don’t believe that this puts QinetiQ’s midterm growth guidance at risk, we do believe that it highlights a less favourable ecosystem for defence,” they said.
Shares in the Farnborough-based group, which derives 21 per cent of revenue from the US, have surged in value by more than a third this year. They lost 3.5 per cent, to close at 415¼p.
Analysts at Goldman Sachs have also noted that, with the US defence budget at a record high, it will be “difficult to embark on any large government spending reduction effort without touching defence”.
The share price declines come after a period of gains for UK defence stocks following the outbreak of conflict in Ukraine and the Middle East. BAE reported a record order book of £69.8 billion at the start of this year amid rearmament programmes across the world.