Continuing reverberations from President Tump’s redrawing of the global world order saw the UK government announce its SDR (Strategic Defence Review), aimed at moving the UK to a position of ‘war fighting readiness.’
Having already committed to increase military spending to 2.5% of GDP (gross domestic product) by 2028, on 1 June Prime Minister Starmer revealed plans to increase spending to 3% during the next parliamentary term (2029-2034).
The spending is aimed at supporting the modernisation of nuclear warheads, the expansion of the nuclear submarine fleet, scaled-up munitions production and enhanced investment in cyber and long-range strike capabilities.
While representing a welcome jump in spending, it may still fall short of the Trump administration’s aspirations to get to the 3% target by 2029 and increased expectations from other NATO (North Atlantic Treaty Organisation) countries.
Later this month the military alliance will vote on a proposal for members to spend 5% of GDP by 2032.
The SDR will see the procurement of up to 7,000 UK-built long-range weapons and £1.5 billion to build at least six munitions and energetics factories.
The government says the Ministry of Defence should lay the industrial foundations for a permanent uplift to munitions stockpiles to meet the demand of ‘high tempo’ warfare.
The funding will see UK munitions spending hit £6 billion in the current parliament and ‘ends the hollowing out of our Armed Forces and will also drive innovation, jobs and growth across the country, allowing the UK to lead in a stronger NATO,’ according to the government website.
The news sent UK defence and aerospace shares higher.
The gains were led by Babcock International (BAB) which jumped 7% to an eight-year high, while BAE Systems (BA.) was up 2% and Qinetiq (QQ.) was 6% higher at 519p, closing in on its all-time high.
Morningstar analyst Loredana Muharremi believes BAE Systems is well positioned to benefit due to its exposure to submarines, munitions and cyber, via its Digital Intelligence division, while Rolls Royce (RR.) will benefit from its role in naval nuclear propulsion.
A broader network of tier-one and tier-two suppliers should also benefit from the localisation of munitions and components, says Muharremi. In this regard it was noteworthy that independent technology group Cohort (CHRT) also saw its shares gain.
While the news is positive for the sector, Muharremi noted any positive impacts will be ‘gradual and backloaded.’
Furthermore, because the SDR aligns with the UK’s prior strategic direction, the news is largely already incorporated into market expectations and consensus forecasts, insists Muharremi.
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