BAE Systems shares climbed more than 3% on Tuesday after Prime Minister Andy Burnham named ex-defence secretary John Healey as Chancellor, lifting the wider UK defence sector.
BAE Systems (LSE:BA) shares rose on Tuesday morning after Burnham appointed Healey, Britain’s former defence secretary, to run the Treasury, a move markets read as a signal that military spending could rise further.
BAE shares were trading at 1,939p on Tuesday morning, up 3.4% from Monday’s close of 1,875p. The stock remains within its 52-week range of 1,529p to 2,360p, having pulled back from highs above 2,300p reached in March.
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Sector-wide rally
According to Reuters, London-listed defence stocks rose on Tuesday, outperforming European peers, a day after Burnham’s reshuffle. Reuters reported BAE Systems shares added 3.1% in early trading, while Babcock International rose 6.8% and QinetiQ gained 4.5%, with the broader European aerospace and defence index up 1%. City AM reported that Babcock and BAE Systems were among the biggest risers when markets opened, with Babcock surging more than 6.5% and BAE Systems up 2.8% in the first half hour of trading.
Healey resigned as defence secretary in June, saying the Treasury had been “unwilling” to fund the military spending increase he wanted. He had pushed for defence spending to reach 3% of GDP with a path to 3.5% by 2035 in line with a NATO commitment, above the roughly 2.7% of GDP pencilled in by 2030 under the previous government’s Defence Investment Plan. City AM reported that Healey and Burnham also want to prioritise British suppliers in defence procurement, a policy that could favour domestic contractors such as BAE.
Tuesday’s move extends a rally that has already lifted defence stocks this year on rising government spending commitments. Chris Beauchamp, chief market analyst at IG, told City AM that Healey’s appointment may not deliver all the gains the sector expects. “As Chancellor, he will have many competing demands, and won’t just be the MoD’s man in No 11,” Beauchamp said, adding that finding more money for defence “will not be easy” given the new prime minister’s other spending pledges. Analysts’ average price target on BAE Systems stands at 2,291p above the shares’ current level.
Attention now turns to whether Healey follows through on higher defence spending once he is running the Treasury, and whether an autumn budget confirms extra funding for the Ministry of Defence. BAE Systems is due to report first-half results on 30 July, a date that could offer the next test of whether the rearmament story is translating into orders and earnings, or whether, as Beauchamp warned, much of the good news is already priced in.