European defence stocks rallied on Wednesday after the shock arrival of Russian drones across the border with Poland sent tensions in the region to fresh highs.
Shares in FTSE 100 giant BAE Systems closed up 2.1 per cent to 1,830p by the end of the day’s trading in London, while Italy’s Leonardo rose 2.4 per cent, Germany’s Rheinmetall rose 3.3 per cent and France’s Thales rose 3 per cent. The moves added a combined £5.2bn to the market caps of the four firms.
Polish president Donald Tusk said Polish airspace had been “violated” by a “huge number” of Russian drones, with a number of them shot down by Nato pilots.
The incident sparked a series of discussions between Tusk, Keir Starmer and other European leaders, as well as with US president Donald Trump, who posted to Truth Social: “What’s with Russia violating Poland’s airspace with drones? Here we go!”
At a meeting of European defence ministers in London, UK defence secretary John Healey condemned the move by Russia and vowed to “look at options” to bolster Nato air defences over Poland.
“We face a new era of threat. War in Europe, rising Russian aggression, and last night, Putin hit a new level of hostility against Europe,” Healey said.
“We saw across Nato’s eastern border a serious violation of Polish airspace, deep enough for Warsaw airport to be closed, and Nato jets shooting down Russian drones in what is the first defensive action of its kind since Putin launched his full scale attack on Ukraine.
“Russian actions are reckless. They are dangerous. They are unprecedented. We see what Putin is doing yet again. He is testing us yet again.”
UK ups defence spending
European defence stocks have soared since the start of the year after European leaders collectively vowed a major increase in defence spending in response to escalating aggression from Russia. Starmer has vowed to increase defence spending to 2.5 per cent of GDP by 2027, rising to 3 per cent in the next parliament.
BAE shares have risen by nearly 60 per cent since the start of the year, while defence firm Babcock’s stock has more than doubled, making it one of the best-performing on the London Stock Exchange.
“Clearly this elevates geopolitical risk once again, and despite Donald Trump’s controversial efforts to broker a peace deal between Russia and Ukraine, it doesn’t feel like we’re edging any further away from the brink,” said Danni Hewson, head of financial analysis at AJ Bell.
“If you explained the current geopolitical situation to someone back in 2021, you’d have some difficulty convincing them that in such a scenario, the global stock market would be hitting record highs, as it is right now.”
On Monday, the UK’s defence ministry pledged to spend £250m on funding five “defence growth deals” across the UK to “unleash the potential of local authorities, businesses and research institutions to support UK defence” in a move that could generate thousands more jobs in the sector.
The government said the cash will help forge long-term partnerships between national, devolved and local government, uniting businesses and research institutions to harness local expertise and resources in defence and the dual-use sectors.
Tom Tugendhat, The MP for Tonbridge, who served as security minister from September 2022 to July 2024, said the City of London has a “vital role to play” in the country’s national resilience as he backed a report calling for greater involvement from the financial services sector to boost defence spending in the UK.