These are tense times for investors as conflicts and geopolitical tensions rock global stock markets.
But against this nerve-jangling background, ‘securonomics’ provides a glimmer of optimism.
These are policies that aim to make Britain not only more secure now, but also more resilient against future shocks.
Defence spending is to be raised from 2.3 per cent of GDP to 2.5 per cent by 2027. The measure will be worth an extra £6billion a year, and there are hopes that this strategy could also bring wider benefits for UK plc, fostering a reindustrialisation of our nation.
The challenges may be huge, but the new higher defence budgets could be the spur to ground-breaking innovation.
Carl Stick, manager of the Rathbone Income fund, says: ‘The technologies that have changed our world such as the jet engine, radar, GPS systems – and the internet – were all born from military necessity.’
Winds of change: Reindustrialisation would mean more demand for energy – this ought to be good news for power network operator National Grid and the wind farm operator SSE
The desirability of such an outcome is adding to the pressure on Chancellor Rachel Reeves to use defence cash to revitalise UK manufacturing. Fortunately, she has pledged this week to ‘fire up Britain’s industrial base and unleash its potential to keep the country safe’, and investors will be hoping that she will keep her word.
Additional money should also be available from the £27.8billion National Wealth Fund (NWF), originally set up to de-carbonise steel and other heavy manufacturing businesses.
In the past, the nation’s security may not have been a factor in how you invest. But the seismic shifts in the global situation are a signal to consider a rapid redeployment of some of your cash.
You may have been less than keen on UK shares lately, but this is the moment to pause and contemplate a new relationship with UK plc, taking a bet on the defence and other businesses that could lead the fightback.
Sentiment is souring towards the US stock markets, amid fears of a ‘Trumpcession’ arising from tariffs, the scything of state budgets by Elon Musk’s DOGE initiative and slumping consumer confidence. This suggests diversification would be wise. Here are your options.
Take a stake in the regeneration game
To take advantage of the colossal amount of construction and development required for reindustrialisation, consider companies such as Breedon, which makes building materials such as aggregates.
Shares are up by nearly 10 per cent this year to 478p but are still rated a ‘buy’ with an average target price of 526p. Reindustrialisation would also mean more demand for energy. As Ben Yearsley of Fairview Investing says: ‘If we are going to build, we’ve got to have the power.’
This ought to be good news for power network operator National Grid and the wind farm operator SSE. Most analysts rate National Grid a ‘buy’ expecting that the shares, which are down 3.2 per cent this year to 929.8p, could reach 1127p. SSE shares have fallen by 9.8 per cent this year to 1469p – but analysts are optimistic, rating the shares a ‘buy’ with a target price of 2143p.
Centrica, owner of British Gas, is rated a ‘hold’ although Jefferies is more enthusiastic, reiterating its ‘buy’ recommendation and raising its target price from 150p to 180p. The price is at 146.5p.
Securonomics should breathe new life into forgotten towns and foster employment, or so Reeves is promising. If you have a real sense of adventure, you could explore the Montanaro Smaller Companies trust whose share price is at 8pc discount to its net asset value (NAV).
The Chrysalis trust may be at a fearsome 38 per cent discount.
Yet it represents a high-risk opportunity to acquire a stake in tech companies that should be able to exploit the innovation arising from defence R&D.
Investors in this trust, like me, will be praying that this will be the case.
Adopt positions in defence of the realm shares
The US broker JP Morgan has increased its share price targets for UK and European defence stocks by an average of 25 per cent based on the reckoning that these nations will devote a minimum of 2.5 per cent of GDP to armaments, of the traditional and cutting-edge type.
Shares in the German giant Rheinmetall have already leapt by 90 per cent since the start of the year.
UK firms have also jumped, but may have further to go. The belief is that their re-rating may only have just begun. It also appears that BAE is fast acquiring the status of a bulwark to any portfolio, although the share price of this giant, Europe’s largest defence contractor, is 40 per cent higher than at the start of the year at 1606p.
Job Curtis, manager of the City of London investment trust, hails BAE’s ‘consistent record of profits and dividend growth’, its global customer base – and its wide range of activities which include aircraft, communications electronics, guided weapon systems, radar and submarines.
Curtis notes that, in 2024, BAE’s sales were £28.3bn, but it received orders worth £33.7billion, giving this giant a favourable ‘book-to-bill’ ratio of 1.2 times.
City of London is one of my long-term holdings. But in the new world order, I am also going to be looking at the other key British defence players.
Babcock is rated a ‘buy’ at 711p. Chemring, the subject of bid interest from US private equity, is also worth snapping up at 410p. Indeed some even regard this price as ‘absurdly cheap’. Melrose is also viewed as ‘attractively valued’ at 488.8p.
Shares in Rolls-Royce may be 18 per cent up over the past year to 809.4p. But this week Deutsche Bank increased its target price to 860p. QinetiQ, whose specialities include cybersecurity and high-tech weaponry, is also seen as a ‘buy’ at 514p.
But also be ready to watch and wait
The flow of money into UK defence companies should improve sales and profits, but new orders will not solely flow into British businesses, as defence procurement supply chains are global.
Jason Hollands, of Bestinvest, says: ‘Given the rapid need to rearm and long lead time on new projects, much of the increased spending will still likely end up with US firms. In fact, this may be seen as desirable in order to anchor the US in continued Nato membership or as part of bilateral trade deals with the UK and EU.’
But the reshaping of the defence industry and the wider revitalisation of UK plc depends on changes, such as reforms to the planning regulations to allow construction and development – and the political will to bring about such a revolution. As Stick points out: ‘There are massive infrastructure hurdles to overcome before we even begin to see any returns.’
This suggests that, while you see some pleasing gains on defence shares in the near future, the regeneration of UK plc may take a while. But you can play your part. America gets more bang for its defence dollars by sharing cash among small businesses that can be more agile. We should be agitating for the same kind of allocation in the UK, given that such firms tend to be the source of job creation and the innovation that will foster revival.
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