UBS Highlights Rolls-Royce and BAE Systems as Top Aeros and Defence Picks Amid Middle East Turmoil

Markets have been shaken since the late February 2026 outbreak of conflict in the Middle East, stirring up volatility around oil prices and inflation fears. Against this unsettling backdrop, UBS's European research team singled out key performers within the Aerospace & Defence sector for a mid-term horizon, focusing on firms that can hold their ground.

Rolls-Royce stands out on the civil aerospace front. UBS points toward the company's ongoing turnaround momentum, buoyed by favorable conditions in the widebody aircraft space-a segment critical to Rolls-Royce's long-haul engine servicing business. The current conflict, while concerning, is not forecasted to severely curtail engine flying hours, since airlines are more likely to reroute rather than ground flights around troublesome airspace.

This redirection strategy means Rolls-Royce benefits from a degree of insulation against the conflict, supported by an industry environment that remains disciplined with steady demand for aftermarket services. For UBS, this translates to confidence in Rolls-Royce maintaining solid operational footing through ongoing uncertainty.

On the defence side, BAE Systems commands attention as a beneficiary of the electronic warfare trend that's gaining steam amid heightened defence spending. UBS highlights its unique advantage: nearly half of its revenue comes from the U.S., with another slice from Gulf countries-both regions where military budgets are on the rise in response to geopolitical strains.

European governments pushing to bolster their defence capacities and Gulf states reinforcing security make BAE's strong order book look promising for revenue stability. This positioning roots BAE firmly as a firm to watch for those tracking defence sector dynamics within turbulent times.

UBS's call on these two stocks reflects a strategic focus on companies with operational resilience and exposure to demand pockets less likely to be derailed by geopolitical headwinds. The analysis also touches on the interplay between global conflict risks and aerospace and defence spending patterns, suggesting a nuanced outlook rather than a simple flight to safety.

Given the ongoing flux in oil prices and persistent inflationary pressure, sectors like aerospace and defence are under close scrutiny for how they balance vulnerability with long-term structural advantages. Rolls-Royce's reliance on long-haul aircraft and BAE's defence contracts could grant them ballast.

Still, the shifting geopolitical chessboard means these picks aren't without risk. How conflict and policy decisions unfold will undoubtedly continue to ripple through markets. Meanwhile, with the S&P and other indices reflecting war-related caution, the aerospace and defence sectors emerge as focal points in the broader story of market adaptation amid uncertainty.