Daily market update: defence stocks, Rolls-Royce, BYD, Domino’s Pizza

“European markets enjoyed a decent start to the week, grabbing investors’ attention as US markets will be closed later for the Labor Day holiday,” says AJ Bell Investment Director Russ Mould.

“Wall Street was weak last Friday as a key measure of inflation came in higher than expected. That negativity weighed on Japan where the Nikkei saw a big drop. Hong Kong’s Hang Seng index was lifted by major constituent Alibaba which was in demand after revealing strong AI-driven growth. Its shares surged by 18%.

“Gold prices were close to record levels as a degree of nervousness stalked the markets. A court ruling on US tariffs introduced another dose of uncertainty which may only be resolved by a Supreme Court ruling in the next month or so.

“In London there was some pressure on mining shares as iron ore futures fell off the back of a rise in Chinese steel inventories and data suggesting the world’s second-largest economy, a rapacious consumer of commodities, is still enduring a malaise.

“BAE Systems was a notable gainer as investors reacted positively to its role in a £10 billion deal between the UK and Norway to supply the latter with at least five new warships.

“The feel-good factor spread to other defence businesses which were pulled higher in BAE’s tailwind. This kind of deal is tangible evidence of how the increased appetite among European countries to spend on their military capabilities could benefit the likes of BAE.”

Rolls-Royce

“Rolls-Royce has been an investor’s ticket to riches in recent years, delivering super-sized share price returns. Its successful turnaround has paid off big time, helping the engineer to become a shining light on the UK stock market. If ever there was a time to capitalise on investor goodwill, it’s now.

“A report in the Financial Times suggests Rolls-Royce is looking at funding options for its small nuclear reactor business, with one potential avenue being a standalone stock market listing for the unit. It was selected in June as the preferred bidder to develop the UK’s first small modular reactors, but any decision on funding paths won’t happen until the contract is finalised.

“Assuming all the paperwork is signed, sealed and delivered for that contract, it’s fair to say that investor appetite to back a spin-off vehicle from Rolls-Royce could be huge.

“Many corporate turnarounds deliver a short-lived share price boost for investors, stalling as reality hits home that it’s not simply about fixing the engine, it’s about making it go faster and harder. Rolls-Royce is a rare example of a company that’s done both – getting its house in order and subsequently grabbing opportunities aplenty. That’s why its shares have continued to move higher.”

BYD

“Shares in BYD fell as investors reacted to the company’s latest financial results, which came out last Friday after the market close. There was major disappointment in the figures, extending a weak run for the shares that has been in motion since May.

“While BYD has forced Tesla into the slow lane in Europe, judging by recent sales trends, on a global basis the Chinese electric vehicle maker is having to navigate a rocky road.

“Quarterly profit has gone into decline amid a price war in China as vehicle manufacturers slash prices to shift units in the race to capitalise on the structural market shift to electric powered vehicle. This transition is going slower than expected in certain parts of the world, yet to its credit, BYD is proving to be one of the top players.

“In China, regulators are clamping down on aggressive discounting, and there are recent signs that money-off deals are becoming less generous. That could see the Chinese market more challenging for electric vehicle companies, if consumers find there are fewer bargains.

“Fortunately for BYD, it is powering ahead in other countries but the big unknown is whether it can sell enough vehicles this year to hit its target. It is targeting 5.5 million vehicle sales in 2025 but had only sold 45% of this target by the end of July. Missing this target would be embarrassing for management and frustrating for investors.”

Domino’s Pizza

“Shares in Domino’s Pizza have had a terrible time this year, not helped by the company lowering full-year guidance alongside its first-half numbers in early August and indicating the pace of new store openings would slow.

“The company had largely resolved issues with licensees which had dogged it in recent years but there remains latent concern about it cannibalising sales from existing outlets by opening new ones.

“While the business claims to be gaining market share there seems to be some scepticism in the market about households’ continuing willingness and ability to spend £15 on a large pizza when you can get one from a supermarket for a fraction of that cost.

“Management have provided their own vote of confidence today by unveiling a buyback which had been hinted at in the recent half-year results. That’s sent the shares higher, but still well below levels seen two years ago.

“Companies are often accused of getting the timing wrong when purchasing their own stock but Domino’s is buying into considerable price weakness.

“What may raise a few eyebrows is this return of capital is accompanied by an increase in the forecast for full-year net debt. Though, reassuringly, the company is sticking with its 2025 guidance in other respects.”