25 February 2025
If you are covering the increase in UK defence spending and the firms that are set to profit, please see the following comment from Matt Dorset, equity analyst at Quilter Cheviot:
"Today's announcement by the UK government to increase defence spending is a significant development for investors. The UK has set ambitious targets, aiming to raise defence spending to 2.5% of GDP (or 2.6% including UK intelligence agencies) by 2027, with a longer-term goal of 3% in the next parliament. This move comes at a time when geopolitics has become increasingly fractious due to the war in Ukraine, the election of Trump, and recent statements from the US administration at the Munich conference. We expect that defence spending may need to increase faster and further over time.
“It is clear that Europe, including the UK, needs to materially ramp up defence spending as Trump appears to be stepping back from an active role in Europe, especially given significant underspend on defence in recent decades. Mark Rutte, NATO Secretary General, has indicated that the new NATO spending target will be ‘considerably more than 3% of GDP’, with various European leaders echoing similar sentiments.
“European defence stocks will be significant beneficiaries in our view. Larger defence budgets will not only increase demand but also likely focus on boosting Europe's own defence production rather than relying on US exports. UK companies with exposure to UK defence spending will be clear beneficiaries of this move, especially given the Government’s focus on ensuring that increased spending also supports British jobs and businesses.
BAE Systems
“BAE Systems is the most obvious example, as it is the UK’s preeminent defence company involved in the production of submarines, fighter jets, combat vehicles, missiles, electronic warfare systems, naval ships, and many more. BAE currently generates 26% of its sales in the UK, and this could grow as domestic defence spending rises.
Qinetiq
“66% of Qinetiq’s sales are in the UK and the business is closely connected to the research and services of the Ministry of Defence, having previously been state owned. This puts the business in a strong position to benefit from increased investment in defence spending. Qinetiq is exposed to faster growing areas of defence spending including research and development and testing and evaluation, which should be bolstered by additional spending commitments.
Babcock
“Similarly, 62% of Babcock’s sales are in the UK so it is likely to benefit considerably from an increase in defence spending. Babcock already has a large order backlog which should increase as defence spending rises, underpinning consistent growth into the future. Babcock’s diversity across land, marine, and nuclear equipment and services provides multiple avenues for growth.
Chemring
“Chemring has global exposure, but 45% of its sales in the UK, making it a likely material beneficiary of increased UK defence spending. Chemring provides various technological solutions for defence markets, including expendable countermeasures to protect air and sea platforms from missile threats and sensor technology. Chemring is already providing military capabilities to Germany, France, Italy, and Spain and is gaining increased traction in Europe and the UK, which will only be supported by the expected increase in demand. Moreover, Chemring has seen recent M&A interest from Bain Capital, with an offer rumoured and a second offer apparently under preparation, which helps to underpin Chemring’s valuation.”
