UK defence shares rise on expectations of higher military spending under Healey

Traders Union
All News
Financial News
UK defence shares rise on spending

Highlights

Babcock International shares rise 4 percent, QinetiQ gains 3 percent, and BAE Systems adds nearly 2 percent after John Healey's appointment as UK chancellor fuels expectations of higher military spending.
Bond markets react more cautiously with gilt yields flat Tuesday after underperformance on Burnham's first day, as investors scrutinize how increased defence spending will be funded without breaching fiscal rules.
Government officials confirm Prime Minister Andy Burnham rejects war bonds and intends to uphold fiscal discipline, while pressure grows for alternative funding methods including potential welfare and pension cuts.

Market reaction to Healey appointment

As reported by the Financial Times, shares in UK-listed defence companies rise on expectations that new chancellor John Healey will increase military spending after leaving the defence brief following a dispute with the Treasury over future funding.

Babcock International, which maintains the Royal Navy’s nuclear submarines and builds warships including the Type 31 frigate, is up 4 per cent on Tuesday. Defence technology group QinetiQ gains 3 per cent, while BAE Systems adds almost 2 per cent.

Brad Greve, chief financial officer of BAE Systems, calls Healey’s appointment “an inspired choice”. He says Healey understands the challenges facing the Treasury and the Ministry of Defence and is well placed to help solve critical problems tied to national security.

Healey and Prime Minister Andy Burnham say they remain committed to fiscal discipline and to the government’s fiscal rules. Healey says fiscal credibility underpins economic stability, growth and national security, while Burnham and his allies indicate the decision to appoint him follows weeks of internal deliberation.

Spending pressures and investor concerns

While serving as defence secretary, Healey argues for an uplift in military spending and supports what he describes as creative funding options, though he does not explicitly endorse broader borrowing to pay for it. Senior government officials say Burnham rejects the idea of issuing war bonds, a proposal many in the City would view as borrowing by another name.

Lord Jim O’Neill, a former Goldman Sachs executive advising Burnham on economic policy, urges the government to fund higher defence spending through cuts to welfare and pension costs. A person close to Healey says he will reassure investors and allies that the fiscal framework remains intact, including Bank of England independence and the current approach to fiscal, monetary and macroeconomic policy.

Bond markets show a more muted response than equities, with gilt yields flat on Tuesday after UK bonds underperform other markets on the first trading day of Burnham’s premiership on Monday. Citi analysts say they expect Healey to act as a tougher counterweight on spending decisions, while investors at Aviva, RBC BlueBay and Aberdeen Investments say the key test will be whether any policy plans are funded credibly without undermining fiscal rules.

Some investors still see risks ahead under the new Labour administration. Burnham’s pledge to act as a “circuit breaker” for the UK economy raises expectations of broader policy change, and Healey’s earlier support for regional growth and fiscal devolution suggests the Treasury could also face pressure to rethink how resources are distributed beyond Whitehall.

In our earlier article on UK gilt yields rising after Andy Burnham’s first-day comments on using flexibility within existing fiscal rules, we explained how investors quickly refocused on the new government’s spending, tax and borrowing plans. We also noted that the subsequent appointment of John Healey as chancellor put fiscal credibility and funding for priorities such as higher defence spending back in the spotlight, as markets weighed limited headroom amid inflation and energy-price pressures.

This material may contain third-party opinions, none of the data and information on this webpage constitutes investment advice according to our Disclaimer. While we adhere to strict Editorial Integrity, this post may contain references to products from our partners.