Rolls and BAE top picks amidst confident aerospace and defence outlook

Morgan Stanley reaffirms its "attractive" outlook for the global aerospace and defence sector, driven by resilient civil aviation aftermarket momentum and robust defence spending, notably in Germany. The bank highlights Rolls-Royce and BAE Systems as top picks, citing strong industry fundamentals including high traffic, low aircraft retirements, and accelerating defence order pipelines, despite some external warnings of a potential civil aerospace aftermarket cycle turn as early as next year.

Analysis

Morgan Stanley has reaffirmed its 'attractive' industry view for the global aerospace and defence sectors, citing distinct but powerful tailwinds for each. The civil aerospace segment is characterized by firm aftermarket momentum, with executives from Safran and MTU Aero Engines reporting robust trends supported by high air traffic, an increased scope of maintenance work, and historically low aircraft retirements. Safran's on-track recovery in LEAP engine deliveries provides a positive read-across for Airbus. However, this optimism is tempered by external analyst warnings that the aftermarket cycle could potentially turn as early as next year. In contrast, the defence sector exhibits unequivocal confidence, driven by a sustained upturn in government spending, particularly in Germany. Defence contractors like Rheinmetall and Hensoldt are anticipating an acceleration in new orders upon final budget approvals, while BAE Systems reports having years of production visibility and Dassault Aviation plans to double its Rafale jet output. The bank's top picks reflect these dynamics, favoring Rolls-Royce and Airbus in aerospace, and BAE Systems and Rheinmetall in defence.

Key Decisions for Investors

• Investors should consider the strong fundamentals in the defence sector, particularly for firms like BAE Systems with multi-year production visibility and German-exposed names like Rheinmetall, which anticipate new orders pending budget approvals.
• While the civil aerospace aftermarket currently supports stocks like Rolls-Royce, it is prudent to monitor leading indicators such as air traffic and airline profitability for a potential cyclical downturn in 2026, a key risk highlighted externally.
• The positive commentary on Safran's LEAP engine delivery recovery implies a strengthening supply chain for Airbus, suggesting investors should watch for continued operational improvements and delivery ramp-ups at the airframer.