Buy the Dip? What does the UK defence investment plan mean for defence stocks

Buy the Dip? What does the UK defence investment plan mean for defence stocks – from Saxo UK Investor Strategist, Neil Wilson

Key points

• Outgoing PM Keir Starmer outlines plans to raise UK defence spending to £80bn a year by 2029,

• Defence spending will grow to 2.7% of GDP but falls short of NATO target of 3.5%

• Spending on drones and nuclear is prioritised, while Tempest jet programme is big winner

Britain’s outgoing prime minister Keir Starmer has outlined an additional £15bn for UK defence over the next four years as part of the long-awaited Defence Investment Plan, or Dip.

The extra funding will see Britain’s spending on defence rise to £80bn per year by 2029, but this falls short of the NATO target of 5% of GDP.

What’s in the Dip?

Nukes: £63bn for developing nuclear-armed Dreadnought and conventional SSN-Aukus submarines, a new warhead and other “crucial nuclear work” over a four-year period. Britain also plans to purchase 12 F-35A stealth fighter jets that can carry nuclear warheads.

Jets: The Tempest, a sixth-generation fighter being made by the UK, Italy and Japan, receives £8.6bn over the next four years. The Global Combat Air Programme is being built without US parts, which is increasingly seen as a necessary element to the UK’s independent defence capabilities. Shares in BAE Systems, which is responsible for the overall aircraft design and flight systems, rose more than 1% on Tuesday following the announcement. The company is working with Italy’s Leonardo and Japan Aircraft Industry Enhancement, which is backed by Mitsubishi Heavy Industries.

Drones: The Dip promises the “largest ever drone investment” as the UK adapts to changing battlefield tactics, which has seen a huge explosion in the use of drones. More than £5bn is earmarked for investing in drone technology over the four years across the Army, RAF and Navy.

AI: £2bn will be spent on AI, specifically integrating the Digital Targeting Web across the armed forces.

Munitions and weapons: £11bn on increasing stockpiles of missiles and the rest, which will see six new factories built by 2030.

Who wins?

Some context matters since we saw a big jump in defence stocks earlier this year because of anticipated extra spending. Firstly, the £15bn over four years is just £1.5bn more than the amount that sparked the resignation of John Healy, the last defence secretary who warned it would lead to defence cuts without much greater additional spend.

Two, we’ve been hearing a lot about the shift towards increased defence spending across Europe and Britain but it looks like nations like the UK continue to stick to their heads in the sand about the nature of threats and the requirement to drastically increase defence spending. Fiscal constraints and sluggish economic growth means it’s not just a simple question of increasing spending. Debt markets will punish extra borrowing – Starmer pointedly ruling out ‘war bonds’ as just extra debt. Germany’s decision to scrap a new warship programme underlined the problem facing governments without the same level of fiscal constraint.

Shares in various defence contractors rose last year on expectations for more spending, but lately investors have been left disappointed. For instance Babcock was a standout performer in 2025 but is down 24% YTD. I’m unconvinced this additional spending truly grasps the fact that the peace dividend no longer exists and we need to spend considerably more.

Still, we are seeing some gainers as there is a little bit more on offer than some had feared a little clarity around what’s being prioritised. One of the reasons for UK defence stocks to come under some pressure has been the long delays to this review – its publication at least brings some visibility and arguably removes some near-term overhang for some stocks to regain momentum.

Apart from BAE Systems as the UK’s defence giant across a huge amount of spend, we also see Chemring – a specialist in sensors, electronic warfare and counter-drone technology, coming out of this rather well. Shares are up about 7% on the announcement. See also Cohort, which trades +3% higher on the announcement. Rolls-Royce gets a lift form nuclear power/Tempest engine considerations, while QinetiQ is one to watch in the field of AI, robotics and autonomous warfare. Babcock, which slumped yesterday as the government dropped plans for new destroyers it was hoping to build, rose about 3%.

There are some other interesting names smaller down the market cap ladder worth investigating. These include Filtronic – a SpaceX supplier – trades +12%; Concurrent – rugged computing specialist with growing Nato exposure – trades flat; MS International – naval gun systems – trades about +1.5% higher.

To summarise, there’s not a huge amount extra in the Dip in terms of actual cash for projects. Drones and AI are clearly becoming more important so I’d look for opportunities in these areas. But overall we can see that the direction of travel is more not less defence spend and this should continue to underpin the sector, particularly as we veer slowly but inexorably towards a new fiscal-compact that will recognise that 2.7% of GDP on defence and 10% on welfare is a wholly unsustainable approach in this dangerous new world.