Can the UK boost defence spending – and which stocks might benefit if it does?
The UK’s Defence Investment Plan (DIP) will boost UK defence spending to £80 billion by 2029 – but that figure is still set to fall short of the NATO target of 5% of GDP.
It sits nonetheless in the context of rising defence spending across the world.
“Global military expenditure hit a record $2.9 trillion in 2025, the 11th consecutive year of growth,” Tom Bailey, head of research at ETF issuer HANetf, told MoneyWeek (citing figures from the Stockholm International Peace Research Institute).
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Much of that increase was driven by Europe; military spending rose 25% across the continent in 2025. But the UK’s defence spend fell 2% in the year.
“Even over the longer term, the UK’s increase looks relatively modest. UK defence spending is up 32% over the past decade, but that compares with much sharper increases in countries such as Germany, Poland, Spain, Japan and Italy,” said Bailey. “If Britain wants to remain a serious global military power it has to increase defence spending.”
This imperative has prompted criticism of the DIP. Former defence secretary John Healey and armed forces minister Al Carns both resigned their posts on 11 June, with Carns saying afterwards the bill was not sufficiently funded and the government was planning to spend money on outdated systems and Healey saying the bill “falls well short of what is required for defence and the country at this dangerous time”.
Former UK defence secretary John Healey quit his position over what he saw as shortcomings in the Defence Investment Plan.
(Image credit: Tolga Akmen/EPA/Bloomberg via Getty Images)
Fixing the defence spending deficit won’t be a case of waving a magic wand for Andy Burnham, who is widely expected to become the UK’s next prime minister.
“Fiscal constraints and sluggish economic growth means it’s not just a simple question of increasing spending,” said Neil Wilson, UK investor strategist at investment bank Saxo. “Debt markets will punish extra borrowing – Starmer pointedly [ruled] 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.”
What does the Defence Investment Plan contain?
Having initially been expected at the end of last year, the DIP was delayed as the Ministry of Defence (MoD) had been pushing for an additional £28 billion of defence spending over the next four years but the Treasury would only permit £10 billion.
In its current form, the DIP allows £298 billion of investment into defence over the next four years – £15 billion in additional spending.
The bill includes provision to spend £20 billion more on the country’s nuclear deterrent over the next four years compared to the previous four, including the purchase of F-35A stealth fighter jets – capable of carrying nuclear warheads.
It also contains £5 billion of investment in drones and autonomous systems over the next four years.
“That may look modest beside the roughly $55 billion for the US’s multi-year Drone Dominance programme,” said Bailey. “But measured against each country’s previous annual defence spending, the UK number does not look small, being roughly 7.5% of 2025 UK defence spending, compared with around 5.8% for the US figure. As a share of GDP, both are also very similar.”
There is also £3.2 billion allocated for space capabilities and £2.5 billion for cyber and electromagnetic defences.
A BAE Systems and Sentinel Unmanned Longreach70 small UAS (Uncrewed Air System) on display during the Security Equipment International (DSEI) in London, September 2025.
(Image credit: John Keeble/Getty Images)
Which companies could benefit from higher UK defence spending?
UK defence spending tends to be quite internationalised with an understandable slant towards domestic companies.
“Since 2019, around 45% of MoD procurement spending has gone to UK-headquartered firms,” said HANetf’s Bailey. “Higher UK spending can benefit UK-listed names but also foreign-listed companies with meaningful UK defence exposure.”
There is a notable attempt to shift from over-reliance on US firms – understandable given the US’s unpredictable foreign policy so far this year.
In terms of the companies that could be expected to benefit, BAE Systems (LON:BA.) is notable due to its central role in the design of the Tempest jet being made jointly by the UK, Italy and Japan. Its shares rose nearly 10% between 29 June and 2 July.
Besides BAE Systems, Wilson also highlights Chemring (LON:CHG) as a potential beneficiary of the MoD’s more technological shift.
“We see Chemring, a specialist in sensors, electronic warfare and counter-drone technology, coming out of this rather well,” he said.
“Rolls-Royce (LON:RR.) gets a lift from nuclear power/Tempest engine considerations, while QinetiQ (LON:QQ.) is one to watch in the field of artificial intelligence, robotics and autonomous warfare,” he continued.
He also highlights some interesting prospects further down the market capitalisation ladder, including SpaceX supplier Filtronic (LON:FTC), Concurrent (LON:CNC) – an embedded computing specialist with significant defence contracts – and MS International (LON:MSI) which, among other things, manufactures navy guns.
Why hasn’t the defence bill boosted UK defence stocks?
These stocks, on the whole, haven’t risen off the back of the DIP.
If anything, the opposite is true. Despite its initial surge after the DIP’s announcement, BAE Systems is up just 2.4% in the 12 months to 8 July. Rolls-Royce is up a healthy 45% over the same period but most of these gains predate the DIP’s publication; between the DIP’s publication and 8 July, the stock fell 1.1%.
Chemring’s share price fell 2.1% over the year to 8 July, while Qinetiq is down 5.3%.
The main reason the DIP hasn’t lifted these stocks substantially is that it was fairly underwhelming. Markets had expected a much more substantial uplift in UK defence spend, and this became priced in.
“Shares in various defence contractors rose last year on expectations for more spending, but lately investors have been left disappointed,” said Saxo’s Wilson.
How to invest in UK defence stocks
Besides buying the shares directly there are few pure-play routes to investing in UK defence.
You could pick an exchange-traded fund (ETF) that offers some exposure.
Two obvious examples are the HANetf Future of European Defence Screened UCITS ETF (LON:NAVY) and the WisdomTree Europe Defence UCITS ETF (LON:WDEP). Both these are specialised in European defence companies; whereas a global defence ETF like iShares Global Aerospace & Defence UCITS ETF has less than 12% of assets invested in the UK (as of 7 July), NAVY and WDEP have approximately 25% of assets (both as of 8 July).
Open-ended funds and investment trusts focusing on defence are thinner on the ground.
JPMorgan Claverhouse (LON:JCH) also offers some UK defence exposure through holdings like Rolls-Royce, Serco (LON:SRP) and BAE Systems – though as of 31 May these three stocks make up just 7.7% of the portfolio.
Whilst only tangentially related to defence, Seraphim Space (LON:SSIT) holds private companies that relate to the space technology theme. Some of these overlap heavily with defence; All.Space, for example, has contracts with the MoD as well as the US Department of Defence.
