Prime Minister Andy Burnham's administration is signaling a significant increase in defence spending, prompting a surge in the share prices of several British defence contractors. This commitment, coupled with key cabinet appointments, suggests a shift towards prioritizing national security and defence capabilities.
Chancellor John Healey, who previously advocated for greater defence funding, is expected to make it a priority. His previous calls for spending 3% of GDP on defence by 2030 align with a broader international trend of increasing defence budgets. Wes Streeting, the new Defence Secretary, has also indicated strong support from the Treasury, reinforcing expectations of a policy change. "It is clear that defence spending as a percentage of UK GDP is on a steadily increasing trajectory over the next decade," noted Laura Foll, joint manager of the Law Debenture investment trust.
This potential uplift in the UK defence budget is seen as part of a global re-evaluation of national security. Joakim Agerback, manager of the Finserve Global Defence & Security Fund, stated that "National security and defence capability are increasingly seen as pre-conditions for stable and resilient societies."
While specific spending targets by 2030 have not been guaranteed, Streeting's commitment not to "do defence on the cheap" has already bolstered confidence. Shares in companies such as BAE Systems, Babcock, Rolls-Royce, Chemring, and QinetiQ saw notable gains. Cohort, an Aim-listed company specializing in sonar systems, has experienced a nearly 42% increase in its share price since the beginning of the year.
The Defence Investment Plan, previously unveiled by former Prime Minister Sir Keir Starmer, acknowledged that defence was "underfunded and unsuited to the threats we face." Burnham's administration appears to share this assessment, potentially leading to further financial injections, possibly through mechanisms like "war bonds."
Companies with significant UK exposure, including BAE Systems, Babcock, Chemring, Cohort, QinetiQ, and Rolls-Royce, are expected to benefit. BAE Systems' shares are trading with an average target price reflecting optimism about both UK defence outlooks and the need to replenish US military stockpiles depleted by conflicts in the Middle East and Ukraine. Babcock's target price also indicates strong potential, driven by its role in building warships and maintaining submarine fleets.
Chemring, involved in the "digital targeting web" initiative to enhance battlefield decision-making, has seen interest from US private equity firm Albion River Management. QinetiQ is also viewed favorably by analysts. Rolls-Royce, a major contractor, has seen its shares soar over the past five years, with analysts anticipating further growth, though its CEO has signaled potential job shifts to the US or Germany if government support for its return to the shorthaul plane engine market is not forthcoming.
Across Europe, some defence stocks have faced challenges due to uncertainty over traditional artillery equipment, which is being increasingly displaced by drones and precision strike systems. US companies like Boeing and Northrop Grumman dominate the drone market. However, German firm Rheinmetall is considered a "buy" despite these headwinds, owing to its other areas of expertise. RTX, formerly Raytheon, is experiencing increased demand for munitions such as Tomahawk missiles.
US shipbuilder Huntington Ingalls, which produces amphibious vessels and nuclear-powered aircraft carriers, is also positioned to benefit from increased UK defence spending. The company's involvement with autonomous underwater vehicles highlights the evolving nature of modern warfare.
For investors seeking diversified exposure, specialist funds and trusts such as the Finserve Global Defence & Security Fund, Van Eck Defence, Han Future of Defence, and iShares Europe Defence offer options. General investment trusts like Law Debenture and City of London also hold shares in key UK defence companies. The sentiment suggests a cautious but optimistic outlook for the defence sector as governments globally re-evaluate their security needs.