UK Defense Stocks Hit Record On Warfighting Buildout Begins

British Prime Minister Keir Starmer has announced a significant overhaul of the U.K.’s defense posture, warning that the British Armed Forces must be prepared to fight a future war in Europe or the Atlantic Ocean. 

“We are moving to warfighting readiness,” Starmer said while unveiling the government’s 130-page “Strategic Defence Review,” which calls for strengthening military forces to deter Russia and other adversaries across Europe and for ramping up weapons production.

Starmer said the U.K.’s defense spending would rise to 2.5% of GDP by 2027 and set out the “ambition” to raise that figure to 3% of GDP in the next Parliament — that is, by 2034 — “when economic and fiscal conditions allow.

The U.K.’s shift to warfighting readiness will include:

• Defence spending to rise from 2.3% to 2.5% of GDP by 2027.

• Ambition to reach 3% by 2034, though political debate continues over accelerating that timeline.

• £15bn allocated to modernize the U.K.’s nuclear warheads and maintain the Trident deterrent.

• £1.5bn to build six munitions factories for sustained production.

• 7,000 long-range weapons (missiles and drones) to be built domestically.

• Creation of a Cyber and Electromagnetic Command for enhanced digital warfare capabilities.

• £1.5bn for military housing upgrades through 2029.

• £1bn for battlefield targeting technology upgrades.

• Continued investment in Dreadnought-class submarines to replace the Vanguard fleet starting in the early 2030s.

The report identifies Russia as an “immediate and pressing danger,” with concerns it could rearm quickly if a ceasefire is reached in Ukraine. China is labeled a “sophisticated and persistent challenge,” while Iran and North Korea are called “regional disruptors.”

On Sunday, U.K. Defence Secretary John Healey acknowledged that the British military has shrunk to its smallest size in 300 years, warning that it now faces the challenge of reversing “15 years of recruitment and retention failure” across the armed forces.

In markets, UBS analyst Tricia Wright told clients that Starmer’s move to increase “warfighting readiness” sent shares of U.K. defense companies like “BAE Systems and Rolls-Royce hit all-time highs with Babcock International at multi-year highs.” 

UBS analyst Daniel Graf made a very interesting point in a note earlier titled “Defense Is To Europe What AI Is To The US“: 

The UBS EU Defense Spending basket (UBXESPND) has more than doubled YTD alone. Rheinmetall shares are +205% YTD. Is it a bubble in a concept stock (where viable alternatives do not come a dime a dozen) or a real winner with fundamental support? HOLT analysis shows Rheinmetall’s current share price still implies revenue growth below management guidance. UBS Research calculate Defense stocks overall are currently pricing in less than 3% of GDP spent by European NATO members in the medium term – at a time when the 5% era appears to become a plausible reality.

Analyst Sven Weier’s research shows 2030 may not be the peak in sales and he takes a benign view on capacity and supply chain constraints. Don’t sell your Rheinmetall shares just yet. Also, despite the broader basket’s performance, the UBS Crowding Score still screens Neutral. Remember this basket trades c. $250 mn per day at 10% of ADV. Next stop: NATO Summit.

All told, there are two dominant investment themes: AI in America and defense in the West. These themes are likely to remain intact well into the 2030s as the AI race with China intensifies and hemispheric defense spending increases across the U.S. and Europe. The world is entering a volatile phase—fracturing into a bipolar geopolitical order.