Looming cuts in America cast a shadow over defence spending

Marc Sidwell
Follow Marc
INVESTORS were certainly not gunning for BAE yesterday, as its announcement of a share buyback and less-bad-than-expected annual numbers saw a bump in its share price, even as the wider index fell.

However, the positive sentiment might be short-lived. The elephant in the room for BAE remains the current uncertainty in the US over defence spending, bearing in mind that in 2012 the US provided 40 per cent of BAE’s income.

America’s battles over government spending have moved on from the fiscal cliff at the end of last year to a new looming deadline of 1 March this year, when something called sequestration is set to go into effect. This is a round of indiscriminate cuts, including a $42.7bn (£27.9bn) reduction in military spending.

BAE chose to ignore the impact of a possible US sequestration in its outlook figures yesterday. That will make it look optimistic if the cuts go through, as seems likely. Some market analysts are already starting to factor the sequester into the calculations they make about the US economy. US Army chief of staff Ray Odierno has warned this risks creating a “hollow army”. It risks making BAE’s predictions ring hollow as well.