MAGGIE PAGANO: Subs deal powers up UK

Forget the reshuffle. The more significant announcement made by Boris Johnson over the last few days is the security and cooperation agreement he has signed with the United States and Australia, or AUKUS as it’s to be known.

In a scene that wouldn’t have looked out of place in a Bond movie, the leaders of the three powers linked up live by video on Wednesday night to unveil what has the makings of one of the most historic defence partnerships for decades.

While none of the leaders – US president Joe Biden, Australia’s Scott Morrison or Johnson – mentioned China directly, their message was crystal clear. Xi Jinping watch out. 

Prime Minister Boris Johnson linked up with with US President Joe Biden and Australian Prime Minister Scott Morrison for a virtual press conference to announce the AUKUS agreement

For the first time, the new AUKUS pact will let Australia build nuclear-powered submarines, using technology and expertise from the US and the UK, to create a new Western bulwark in the Asia Pacific region.

While Biden got himself into another muddle addressing Morrison as that ‘fella down under’, Johnson used his spot in the limelight to spell out how AUKUS will be a big boost for new jobs and investment to the UK, and, of course, he couldn’t resist adding, will help with ‘levelling up’ across the country. 

So it might. Shares in Rolls-Royce and BAE jumped on the overnight news as both companies are involved in building submarines and associated technologies.

At the Barrow shipyards in Cumbria, BAE Systems designs and makes nuclear submarines for the Royal Navy, the latest being the Astute model. 

For its part, Rolls-Royce is a specialist in nuclear propulsion for submarines, having provided the power for all of the Royal Navy’s nuclear submarines at its Derby factory for the last 60 years.

It’s too early to know the details of the agreement – and who gets what and where – but at first glance the pact is good for BAE, which generates just over two thirds of its income from the three countries, while Rolls-Royce earns about half of its revenue from the three.

The timing is good too as both companies have been hit badly by the pandemic because of their big exposure to civil aerospace, a sector which will take years to recover because of the slowdown in long-haul air travel.

Laura Hoy at Hargreaves Lansdown says there will be other benefits for BAE and Rolls-Royce as they also have interests in AI, cyber-security and other surveillance technologies – another part of the new agreement – and so will some of the world’s biggest tech companies.

It’s hard not to have some sympathy for the French – also a nuclear power – which has been left out in the cold. For now, anyway, it looks as though the French deal with Canberra to supply diesel submarines has been dropped. 

If the trio are sensible, they will find a role for the French, one of Nato’s biggest military spenders alongside the UK, and not a country to snub.

Whether you approve or not of higher defence spending, the new pact signals that higher spending is here to stay and that Biden is no less keen on turning off the defence spending tap than Trump was.

Holding defence stocks has suddenly become far more defensive.

Marlboro man

It’s time for some of the City’s big investors to hold up a mirror to look again at their mission statements and compare them to what they do in practice.

The latest example of the contrast between the two is how so many of the UK’s big institutions have rolled over to accept the bid by Marlboro owner Philip Morris for Vectura, the inhaler business.

Most of those same investors, however, are all too eager to spout off about their concern for ESG matters, and how deeply they care about the environment, diversity and other sensitive issues.

But there is a case for accepting big tobacco’s money in return for Vectura’s shares, which is that they believe the Philip Morris boss when he says he wants to quit the habit, and that backing him to make that move is a positive one.

If that’s the case, they should say so. Otherwise, why should shareholders believe them on any other issue?

Market driven

Walking through my local Waitrose car park earlier this week, I overheard two young chaps chatting about the lorry driver shortage.

One said to the other: ‘Have you heard, they are shortening the HGV test and supermarkets are paying bonuses for new drivers. I’m thinking of leaving my job and going for it as I can double my pay.’

The other replied: ‘I’ve already quit mine. Start training next week.’

Maybe the market is working.