Defence stocks rally as John Healey appointed UK Chancellor

Babcock and Rolls-Royce shares rally as investors bet on increased defence spending

Defence stocks including Rolls-Royce surged to new highs on Tuesday as investors increased bets that newly appointed Chancellor John Healey would channel further funding into London-listed arms companies.

Babcock and BAE Systems were among the biggest risers when markets opened, approximately 12 hours after former Defence Secretary Healey was appointed to head the Treasury under Prime Minister Andy Burnham.

Market Performance

• Babcock: Shares surged more than 6.5% in the first half hour of trading
• BAE Systems: Rose by 2.8%
• Rolls-Royce: Edged up by 0.7% to reach 1,369p
• Serco: Rose by 1.7% (operates facilities and provides services to the Ministry of Defence)

The rally reflects investor optimism about a more rapid increase in defence spending under Chancellor Healey, with British firms expected to be prioritised in procurement as part of efforts to "re-industrialise" the country.

Rolls-Royce's Gains

Last month, Healey resigned from Sir Keir Starmer's government over a lack of funding for defence spending. He accused the Treasury of being "unable" to provide sufficient cash for the military after it refused to set a date for raising defence spending to 3% of GDP.

Under the current Defence Investment Plan (Dip), spending is expected to reach approximately 2.7% of GDP by 2030. Healey has argued for spending to reach 3% and for the UK to set a timeline on reaching 3.5% by 2035, in line with a NATO agreement.

Healey and Burnham have also indicated they would prioritise British firms in government procurement, building on a commitment made in Starmer's Dip. This could position domestically-listed companies for stronger years ahead as contract pipelines are expected to improve.

Industry Reaction

Following Healey's appointment, one industry source told City AM that bosses were "rejoicing" at the prospect of an uplift in defence spending. The source added that Burnham made an "incredibly sensible" pick and suggested Healey could explore procurement agreements under Canada's Defence, Security and Resilience Bank — an approach not backed by Starmer and former Chancellor Rachel Reeves.

Rolls-Royce's Defence Portfolio

Rolls-Royce has become a key provider of engines for aircraft, submarines and other power systems. Its technology will be used in the new Dreadnought submarine fleet under the government's nuclear deterrence strategy. The company's Lift System engines are also used in F-35 jets, and it provides support for the Typhoon fleet. Additionally, Rolls-Royce holds contracts to develop autonomous drones, which are set to be prioritised by the government.

Cautionary Note

Chris Beauchamp, chief market analyst at investment platform IG, warned that Healey's appointment may not deliver the gains defence firms anticipate.

"As Chancellor, he will have many competing demands, and won't just be the MoD's man in No 11," Beauchamp said.

"His experience made him an obvious candidate for the role, and he represents a middle way between [Ed] Miliband and [Shabana] Mahmood, but it will not be easy to find lots more cash for defence, especially when the new Prime Minister is so busy making broad spending commitments in other areas."