FTSE 100: Rolls-Royce, BAE Systems and Other Defence Names Rally as Sector Spending to Climb

Shares in Britain’s major defence groups rose on Monday as investors positioned for what analysts describe as a multi-year upswing in global military spending.

Rolls-Royce (LON: RR.) climbed 2.1%, BAE Systems (LON: BA.) gained 3.1%, Babcock International (LON: BAB) added 3.6% and Melrose Industries (LON: MRO) jumped 3.9%.

The moves follow the 2026 Munich Security Conference, where analysts at UBS said transatlantic tensions had eased but warned the underlying “rebalancing forces” within NATO were becoming more visible.

UBS said in a note that while no major spending pledges emerged from the meeting, several catalysts “continue to support the investment case for the global defence sector.”

Central to that outlook is a clear upward trajectory in defence budgets. UBS highlighted calls by US President Donald Trump for a 50% increase in American defence spending for 2027, alongside pressure on NATO allies to hit a 5% of GDP target.

“This policy clarity provides a multi-year runway for defence sector growth,” the bank said, pointing to Germany, Poland and Nordic countries already moving toward these levels.

Geopolitical risks, reshoring, and Europe’s renewed push for strategic autonomy are also fuelling demand, with UBS noting that nations across the Asia-Pacific, including Japan, South Korea, and Australia, are expanding domestic production to reduce reliance on imports.

Rising investment in AI, missile defence and digital systems is expected to underpin sector revenues.

In the UK, the BBC reported on Sunday that Prime Minister Keir Starmer is considering accelerating defence spending to 3% of GDP by 2029. While no decision has been made, the review adds another potential boost for British defence suppliers.

UBS remains “constructive” on European defence names, particularly diversified suppliers with strong exposure to US and German contracts.