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Should I invest in the UK defence sector?

02/04/2024

In February 2024, the Government announced that MOD spending on the UK defence sector topped £25bn for the first time in 2022/23. This marks the third consecutive year of increased spending by the Government on this sector, with rising global threats being the reason behind the decision. 

Government spending and investor spending, however, are two very different things. Should investors be following suit and investing in UK defence too?

 

What are UK defence stocks?

A UK defence stock is a share in a company that provides products or services to law enforcement or military organisations. These could involve the creation of products, like vehicles, weapons or materials. They could also include companies that provide services, such as intelligence, cybersecurity or training. 

These products and services are sold to governments – so in theory, the greater the government’s spend on defence, the bigger the market will be for those operating in the sector. While government spend on defence here in the UK is growing, though, this doesn’t automatically mean that the sector is definitely a good investment. 

 

Is the UK defence sector worth investing in?

Defence companies are often contracted to work with organisations – and these contracts will often last for 10 years or more. These contracts are also known for being hard to disrupt. Many investors will often check how much of a contract is remaining and what the potential competition looks like before deciding to invest in a particular defence stock. 

However, as with any investment, there are always risks. Defence companies can be impacted by supply chain disruption or increased raw material costs – and their capital structure and financial health will also have a part to play. 

What’s more, ESG guidelines are currently affecting investment in this sector. London Stock Exchange data reveals that fund managers have reduced holdings in UK defence companies by 9% since early 2022, with “overcautious or misapplied ESG considerations” said to be hampering the sector’s attempt to secure finance. 

With global threats including the war in Ukraine, the conflicts in the Middle East and China’s military presence in Taiwan, though, could the defence sector be one to watch?

 

“Stable Rise Limited is not authorised or registered by the Financial Conduct Authority. The marketing materials are not intended to provide financial advice nor promote any individual financial products.”

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