Markets have been unsettled since the onset of conflict in the Middle East in late February 2026. UBS's European research team says the new geopolitical backdrop - which has pushed oil prices higher and added inflationary pressure - has reshaped near-term investor priorities within Aerospace & Defence. Against that backdrop, analysts at the bank highlight two companies they consider best positioned to navigate the current uncertainty and produce returns over a three- to six-month time frame.
Rolls-Royce (Buy, PT: 1,550p - implied upside: ~40%)
Within civil aerospace, UBS places Rolls-Royce at the top of its preferred list. The bank points to the continuation of the company's long-term turnaround as a central pillar of the investment case. Industry feedback cited by UBS suggests a divergence between segments of the commercial aircraft market - with the widebody fleet described as tighter than the narrowbody market. That dynamic is seen as incrementally positive for Rolls-Royce because a meaningful portion of the firm's revenue is derived from long-haul engine servicing.
UBS further argues that, even if tensions in the Middle East endure, the likely impact on Engine Flying Hours growth would be limited. The bank's view is that long-haul capacity is more likely to be rerouted around affected airspace rather than removed from service entirely, which reduces direct exposure for engine servicers. Coupled with what UBS describes as a disciplined industry backdrop and steady aftermarket demand, these factors make Rolls-Royce the bank's most comfortable civil aerospace holding through a period of sustained uncertainty.
BAE Systems (Buy, PT: 2,600p - implied upside: ~26%)
On the defence side, UBS emphasizes companies with meaningful exposure to the electronic warfare theme, and BAE Systems is highlighted as the clearest European beneficiary of that structural trend. UBS underlines BAE's distinctive geographic revenue mix: approximately 43% of revenues come from US customers and a further 10% from Gulf clients. That split gives the company dual leverage to two of the most active defence spending environments at present.
As European governments accelerate rearmament and Gulf states increase security investments amid regional instability, UBS says BAE's order book and revenue visibility appear increasingly supported. For investors seeking defence exposure that combines near-term catalysts with long-cycle earnings durability, the bank positions BAE as the preferred vehicle.
Implications for markets and investors
UBS's recommendations frame a shortlist of names it believes can withstand the present mix of elevated oil prices, inflationary pressure, and geopolitical uncertainty. The bank's preference for a civil aerospace engine-servicer and a defence prime with electronic-warfare exposure reflects a view that different subsectors within Aerospace & Defence will be affected unevenly by the current environment, and that companies with specific structural advantages may offer relative resilience.
Investors should note UBS's stated time horizon of three to six months for the expected performance of these picks.