The appointment of John Healey as Chancellor of the Exchequer by Prime Minister Andy Burnham's new administration has sent a clear signal to investors: increased defence spending is on the horizon. With Healey, a long-time advocate for raising defence budgets, at the helm, major UK defence companies are poised to benefit from a significant influx of funds. The data bears this out, with shares in key players such as Babcock and BAE Systems surging following the announcement.
Babcock's stock price rose by 6.5 per cent in the first half-hour of trading, while BAE Systems saw a 2.8 per cent increase. Rolls-Royce, a major supplier of engines for aircraft and submarines, edged up by 0.7 per cent to 1,369p, while Serco, which manages Ministry of Defence facilities and services, recorded a 1.7 per cent gain.
The market reaction is largely driven by Healey's previous stance on defence funding, including his criticism of the Treasury's reluctance to commit to raising defence spending to three per cent of GDP by 2035. His advocacy for this increase is in line with NATO agreements, and he had previously stated that such a commitment would require an additional £10 billion annually. Under the current Defence Investment Plan (DIP), defence spending is projected to reach approximately 2.7 per cent of GDP by 2030.
Furthermore, Healey and Prime Minister Burnham have expressed their intention to prioritise British firms in government procurement. This echoes sentiments from Starmer's previous DIP, which highlighted the importance of supporting domestically listed companies through lucrative contracts. Such a commitment could lead to improved pipelines for defence firms, potentially fostering a 're-industrialisation' of the country.
While analysts believe that Healey's appointment is a positive development for defence stocks, some caution that the expected gains may not materialise as easily as investors hope. Chris Beauchamp, chief market analyst at IG, noted that while Healey's experience makes him a logical choice for Chancellor, he will now face numerous competing demands across government. Finding substantial additional funds for defence could prove challenging, particularly given the new Prime Minister's broad spending commitments in other policy areas.