Defence stocks rallied sharply in London on Tuesday after John Healey, the former defence secretary, was named as Britain’s new Chancellor of the Exchequer.
Investors responded positively to the appointment, which was announced late on Monday evening, signalling confidence in Healey’s commitment to military spending.
Babcock was the standout performer on the FTSE 100, with its shares jumping 7.8% in early trading on Tuesday morning.
BAE Systems (BA.L) climbed 3.25%, while defence technology firm Qinetiq also moved 4% higher as markets digested the news of the cabinet reshuffle.
Healey had resigned as defence secretary from Sir Keir Starmer’s government last month, accusing the former prime minister and chancellor Rachel Reeves of putting national security at risk over a long-awaited defence investment plan.
That plan, announced late last month, saw the previous prime minister commit to increasing defence spending by £15 billion, putting the UK on a trajectory toward 3% of GDP in the next parliament.
That figure would still fall short of the Nato target of 3.5% by 2035, leaving the new Chancellor under pressure to find further funding for the military.
Around £4.7 billion of the previously announced defence plan remains unfunded, presenting a significant fiscal challenge for Healey as he settles into his new role.
Healey has previously indicated he would consider the use of “defence bonds”, borrowing allocated specifically for the military, to help boost its financial resources.
Dan Coatsworth, head of markets at AJ Bell, said: “UK defence stocks motored higher on Healey’s appointment, given his previous role in pushing Keir Starmer to agree to higher defence spending.”
Coatsworth added: “The market is taking the view that defence is close to Healey’s heart, and he will drive through increased funding under his new role as Chancellor.”
New Prime Minister Andy Burnham is widely expected to commit to further defence spending in a bid to reach the Nato international target of 3.5% by 2035.
Water sector stocks moved in the opposite direction on Tuesday, drifting lower after Burnham reiterated calls to bring more industries into “public control” following his appointment as prime minister.
South West Water owner Pennon and United Utilities were both lower in early trading as investors weighed the implications of potential nationalisation policies under the new government.
Broader equity markets remained largely stable, with the FTSE 100 (^FTSE) edging up 0.1% to 10,535.61 points as cabinet appointments were confirmed throughout the day.
Burnham’s new cabinet also saw Jonathan Reynolds return as Business Secretary, a role he previously held until last September, with expanded responsibilities following a departmental restructure.
The Department for Science, Innovation and Technology is set to be shut down, with much of its remit merged into Reynolds’ business department under the new administration.