Shares in major defence firms, including Rolls-Royce, Babcock, and BAE Systems, surged to record highs on Tuesday after John Healey was appointed as the UK's new Chancellor. The former defence secretary's promotion to head the Treasury under Prime Minister Andy Burnham has fuelled investor optimism over a significant increase in defence spending and a shift towards prioritising British manufacturers in government procurement.
Market Reaction
Babcock shares jumped by more than 6.5 per cent within the first half hour of trading on Tuesday, while BAE Systems climbed by 2.8 per cent. Rolls-Royce stock edged higher by 0.7 per cent, reaching 1,369p. Serco, which operates several facilities for the Ministry of Defence, gained 1.7 per cent. The surge reflects investor confidence in a swifter acceleration of defence expenditure under Healey, with British firms expected to be given priority in procurement as part of a drive to "re-industrialise" the nation, as reported by City AM.
Healey's Defence Spending Stance
Last month, Healey resigned from Sir Keir Starmer's government, citing insufficient funding for defence. He accused the Treasury of being "unable" to provide enough cash for the military, as it refused to set a date for raising defence spending to three per cent of GDP. Under the existing Defence Investment Plan (Dip), expenditure is set to reach approximately 2.7 per cent of GDP by 2030. Healey has argued for spending to climb to three per cent and for the UK to establish a roadmap towards achieving 3.5 per cent by 2035, in line with a Nato agreement.
Prioritisation of British Firms
Healey and Burnham have also expressed a desire to favour British companies in government procurement, drawing on a pledge enshrined in Starmer's Dip. This could position domestically-listed firms for more prosperous times ahead, as contract pipelines appear poised to strengthen. Following Healey's appointment, one industry insider told City AM that senior executives were celebrating the prospect of an increase in defence spending. They further noted that Burnham had made an "incredibly sensible" choice, and suggested Healey could explore procurement arrangements under Canada's Defence, Security and Resilience Bank — a mechanism not backed by Starmer and former Chancellor Rachel Reeves.
Rolls-Royce's Key Role
Rolls-Royce has established itself as a key supplier of engines for aircraft, submarines, and other power systems. Its technology is earmarked for the forthcoming Dreadnought submarine fleet as part of the government's nuclear deterrence strategy. On Thursday, the company announced plans for a new £100 million factory and defence research facility in Bristol. Its Lift System engines are also deployed in F-35 jets, while the company provides support for the Typhoon fleet. Rolls-Royce also holds contracts to develop autonomous drones, which are expected to be prioritised by the government.
Cautious Outlook
Chris Beauchamp, chief market analyst at investment platform IG, cautioned that Healey's appointment might not produce the benefits that defence companies anticipate. "As Chancellor, he will have many competing demands, and won't just be the MoD's man in No 11," Beauchamp said. "His experience made him an obvious candidate for the role, and he represents a middle way between [Ed] Miliband and [Shabana] Mahmood, but it will not be easy to find lots more cash for defence, especially when the new Prime Minister is so busy making broad spending commitments in other areas."
