Defence stocks received a notable lift on the FTSE 100 as investors reacted positively to new Prime Minister Andy Burnham’s appointment of John Healey as Chancellor of the Exchequer.
BAE Systems (LSE: BA.) rose 0.8% while Babcock International (LSE: BAB) surged as much as 4%, with both moves directly linked to Healey’s well-known hawkish stance on military spending.
Healey resigned as defence minister last month following a dispute over the level of resources being committed to Britain’s armed forces.
In his resignation letter, Healey wrote that the previous government was “unwilling to commit the resources that the nation needs to defend the country at this time of rising threats.”
His appointment to the Treasury is now being read by markets as a bullish signal for accelerated and frontloaded defence expenditure going forward.
The former government had agreed to a NATO commitment to reach 3.5% of GDP on defence by 2035, but Healey had argued Britain needed an interim target of 3% of GDP by 2030 to match most European allies.
He criticised the Defence Investment Plan for falling short, suggesting it implied spending of just 2.68% of GDP by 2030, rising only marginally from 2.6% in 2027.
Babcock’s sharper share price gain reflects its much greater exposure to UK government contracts, with over 70% of the firm’s revenue last year derived from domestic sources.
BAE Systems, by contrast, generates almost half of its sales from the United States, giving it far greater geographic diversification and exposure to a US military budget that appears set to expand significantly.
BAE also offers investors a higher dividend yield of 2.2%, compared with Babcock’s 1.2%, alongside a larger order backlog and superior operating margins despite carrying a forward price-to-earnings ratio of 21 versus Babcock’s 16.
In a separate development, Canada announced it will join the Global Combat Air Programme as an observer nation, a potential stepping stone to full membership alongside founding partners the UK, Italy, and Japan.
Rolls-Royce has previously indicated that the next-generation stealth fighter jet being developed under GCAP holds greater export potential than the Eurofighter Typhoon, underlining the long-term commercial significance of the programme.
BAE Systems is a key player in GCAP, adding further weight to the bullish long-term case for the stock beyond near-term spending announcements.
Both stocks remain sensitive to any signs that European defence commitments could falter, and a formal end to the conflict in Ukraine could trigger short-term selling pressure across the sector.
However, the multi-decade government spending commitments that underpin valuations in the sector are unlikely to be unwound by a single geopolitical development, supporting the longer-term investment case for both companies.