Shares of BAE Systems (LSE:BA.), Rolls-Royce (LSE:RR.) and Babcock International (LSE:BAB) moved higher on Tuesday, climbing between 2% and 2.5% as investors positioned for increased UK defence expenditure and stronger long-term demand across the sector.
The gains reflected growing expectations that government spending on military capabilities will continue to rise amid an increasingly uncertain geopolitical environment.
Defence Budget Review in Focus
Market attention has turned to Defence Secretary Dan Jarvis, who is expected to reassess the government’s defence investment strategy and may seek additional resources from the Treasury.
Jarvis took over the role following the resignation of John Healey last week. Healey stepped down after rejecting a proposed funding package, arguing that it would leave the UK’s armed forces without sufficient resources to meet future requirements.
The former defence secretary opposed a £13.5 billion funding proposal designed to address an estimated £18 billion gap in financing for major military programmes.
Government Signals Further Spending Increases
Investor sentiment was further supported by comments from Chancellor Rachel Reeves, who said there would be “a further big uplift in defence spending” as part of the government’s long-term investment plans.
Prime Minister Keir Starmer has also committed to increasing defence spending to 3% of gross domestic product during the next parliamentary term, with the objective of reaching that level by the end of 2034.
The pledge is expected to underpin future contract opportunities for leading defence contractors, many of which already have extensive multi-year order books.
Geopolitical Risks Support Sector Outlook
Defence stocks also benefited from heightened geopolitical tensions ahead of the G7 leaders’ summit in France, where security concerns involving Russia and Iran are expected to feature prominently on the agenda.
The conflict involving Iran has now entered its fourth month, while tensions with Russia remain elevated following the seizure of a Russia-linked oil tanker by Britain’s Royal Marines in the English Channel over the weekend.
Starmer is expected to use the summit to advocate for tougher sanctions against Russia and additional military and energy assistance for Ukraine.
Defence Remains a Strong Performer Across Europe
The defence industry has been one of the standout sectors in UK equity markets in recent years, supported by a broad revaluation as Western governments increase military budgets in response to evolving security challenges linked to Russia, China and other geopolitical threats.
The trend extends across Europe, where defence spending continues to rise sharply. Industry estimates suggest that total European Union defence expenditure will exceed €392 billion this year, compared with €221 billion in 2021.
The sustained increase in military investment is expected to provide a favourable backdrop for defence companies across the continent, supporting long-term growth prospects for equipment manufacturers, engineering groups and military service providers.
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