Defence stocks soar on spending boost: Babcock leads the charge after Starmer announces plan to build more submarines
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Defence stocks soared yesterday after Keir Starmer vowed to make the country ‘battle-ready’.
Although the Prime Minister refused to commit to a date for when defence spending will reach 3 per cent of GDP, his strategic review of the UK’s military promised to build 12 nuclear-powered attack submarines.
There are also plans for six munitions factories, a cyber unit to protect the UK against digital attacks and a £15billion investment in nuclear warheads.
Shares in BAE Systems and Rolls-Royce, which build and power Royal Navy submarines, hit record highs, while Babcock, which services and maintains the fleet, jumped 8.2 per cent to levels last seen in 2016.
Explosives and countermeasures specialist Chemring reached a 14-year high and defence robotics, surveillance and cyber security group Qinetiq gained 4.5 per cent.
Loredana Muharremi, an equity analyst at US research giant Morningstar, said the spending plan ‘is unequivocally positive’ for UK defence stocks – though questions remain over how it will be funded amid fresh warnings of taxes rises.
Britain and other European countries are racing to rebuild their military capabilities after US President Donald Trump said the Continent must take more responsibility for its own security – and called on nations to spend 5 per cent of GDP on defence.
BAE shares are up 250 per cent since the start of 2022, when Russia invaded Ukraine, and Rolls-Royce has risen more than nine-fold since Tufan Erginbilgic took over as chief executive in January 2023 – giving it a value of about £73billion.
Babcock shares have doubled this year alone.
Launching his Strategic Defence Review in the shadow of Type 26 frigates being built at BAE’s Govan shipyard in Glasgow, Starmer said ‘the moment has arrived to transform how we defend ourselves’.
The Government has pledged to increase defence spending from 2.3 per cent of GDP to 2.5 per cent by 2027 and has an ‘ambition’ – but no firm commitment – for it to rise to 3 per cent.
Babcock was seen as a big winner from the plan to build a new fleet of submarines under Britain’s AUKUS security partnership with the US and Australia.
The Ministry of Defence also said the investment would ‘see a major expansion of industrial capability’ at BAE’s submarine-building site in Barrow-in-Furness, Cumbria, and at Rolls-Royce’s Raynesway nuclear reactor plant in Derbyshire.
But the end of the so-called ‘peace dividend’ is a major headache for Chancellor Rachel Reeves as she struggles to meet her fiscal rules as well as rising UK gilt yields – pushing up Government borrowing costs.
Institute for Fiscal Studies director Paul Johnson warned ‘quite chunky tax increases’ will be needed to pay for the extra spending.
Former Bank of England chief economist Andy Haldane suggested Reeves will have to shred her fiscal rules to free-up cash for defence.
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