Amid the clamour over major defence contracts, a quieter revolution is taking place among Britain’s smaller defence companies. These firms, often listed on the FTSE All-Share or the Alternative Investment Market (AIM), have seen their shares rise by an average of 18% over the past 12 months, according to data from the London Stock Exchange. This outperforms the FTSE 100’s defence sub-index, which gained around 11% over the same period. The surge reflects growing demand for niche capabilities such as armoured vehicle components, electronic warfare systems, and secure communications equipment.
The Bank of England’s decision to hold the base rate at 5.25% has provided some stability for these companies, many of which rely on debt financing to expand production. Lower borrowing costs have eased margin pressures, but the sector still faces headwinds from elevated material costs and a tight labour market for skilled engineers. For UK households, the ripple effects are indirect but real: these firms employ over 50,000 people across the Midlands, the North West, and Scotland, often in areas with fewer alternative high-skilled jobs.
For savers and investors, small defence stocks present a higher-risk, higher-reward proposition compared to blue-chip contractors. The sector’s volatility was evident last month when a profit warning from a Midlands-based electronics supplier sent its shares down 22% in a single day. Conversely, a Glasgow-based cybersecurity firm saw its stock double after winning a Ministry of Defence contract. The FTSE 250, which includes several mid-cap defence firms, has risen 6% year-to-date, partly buoyed by this sub-sector.
Mortgage holders should note that the Bank’s rate path remains uncertain. If inflation, currently at 3.9%, stays above the 2% target, further rate rises could increase borrowing costs for these firms, potentially slowing their growth and affecting local employment. However, the government’s commitment to raise defence spending to 2.5% of GDP by 2030 provides a long-term tailwind for the entire supply chain.
Industry analysts point out that these smaller firms are often more agile than their larger counterparts, able to pivot quickly to new technologies such as drone countermeasures and cyber defence. Yet they remain vulnerable to supply chain disruptions, particularly for semiconductors and rare earth metals sourced from outside the UK. The Ministry of Defence’s new ‘SME Action Plan’, announced in March, aims to streamline procurement and reduce payment delays, which could boost cash flow for these companies.