Stocks in UK weapons manufacturers are having another strong week after Prime Minister Keir Starmer pledged to increase British defence spending to its highest in decades.
Starmer announced the “biggest sustained increase in defence spending since the end of the Cold War”, with the UK set to increase arms spending from 2.3 per cent to 2.5 per cent of GDP by 2027.
“Defence stocks have continued to be in vogue as European governments face up to the changing global landscape and the need to spend more,” explained Danni Hewson, head of financial analysis at AJ Bell.
Starmer’s pledge came following the German election, which has resulted in a likely coalition between the centre-right CDU/CSU and the centre-left SPD.
Future chancellor Friedrich Merz pledged “independence” from the United States following the election, with markets expecting an uptick in German spending on weapons as a result.
Merz has also reportedly already opened talks with the SPD over emergency defence spending for as much as 200bn euros (£166bn), even before a formal coalition deal is made and the new legislature sits in a month.
“Any increased fiscal spending in Germany would be focused on defence, given the geopolitical backdrop,” explained Irene Lauro, European economist at Schroders.
“President Trump has been clear in his view that Europe needs to spend more on its own defence. Germany currently spends 1.4 per cent of GDP annually on defence and this would need to rise to 3.5 per cent if Germany were not to be reliant on US help.”
Yesterday, weapons manufacturer Rheinmetall was the strongest performer on the German stock market, and is up almost 60 per cent since the start of 2025.
BAE Systems joined in the rally today. The stock surged to the top of the FTSE 100, rising 4.3 per cent after the government’s announcement on defence spending.
Rolls-Royce, which is set to report its full-year results later this week, also jumped 1.9 per cent.
The Derby-headquartered FTSE 100 giant is expected to report earnings per share of 18.6p, up from 12.7p in 2023 and 0.8p in 2022, while its defence sales will rise to £4.6bn from £4.1bn in 2023.
“Rolls-Royce will continue to be rerated to valuations closer to its European aeroengine peers” like Safran and MTU, said Panmure Liberum analyst Nick Cunningham.
Another UK defence stock, Chemring, also saw its share price jump after reports emerged that Bain Capital was attempting a takeover bid.