Defence of the realm is pre-eminent but should also create employment and wealth!
28 February 2025, 09:42
“Hindsight is the most successful trader on earth” and “it’s easy to be wise after the event” are two of the most ‘hackneyed phrases’ in the English language, ever to be trotted out.
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However, when it comes to the defence of the realm, which has necessitated the UK Government finding itself forced to increase the defence budget from 2.3% of GDP to 2.5% of GDP in 2027, those phrases clearly endorse the gravity the UK and Europe finds itself in, especially as it appears President Trump could be less well disposed towards Europe (excluding the UK), than his predecessors were.
However, the US President is right in insisting that Europe should take more responsibility over defence and security, rather than rely on the US to underwrite its requirements
Despite the fact the increase in expenditure will provide another £13.4 billion on an annualised basis towards the defence budget, many like me, fear it’s too little too late and it will be some years before the country feels a little safer. The rate will increase to 3% of GDP in 2030.
How successive British Governments have allowed numbers in our army to drop from 110,000 in 2000 to 72.500 in 2025 in such precarious and dangerous political circumstances, I will never comprehend.
During this century alone, Russia, North Korea, Syria and China have provided a powerful vanguard to threaten world peace. Also, at the same time, the Ministry of Defence has allegedly spent £6.2 billion on two new aircraft carriers, which in modern-day warfare strike most people as sitting ducks.
Despite the positive approach taken by PM Starmer this week, the increase in defence expenditure is but a mere bagatelle. The chief of the defence staff, Admiral Sir Tony Radakin, were he not a loyal Government appointee, would have plenty to say on the wholly inadequate increase, welcome though it is, as would his predecessors General Sir Nick Carter and General Lord Richard Dannatt, stretching back to Field Marshall Lord Charles Guthrie.
The good news, emanating from this force of circumstances, is that the increased expenditure should create jobs and opportunities here in the UK. BAE Systems has flown the flag in this arena for decades. It is considered one of the UK's major exporters, by selling a large volume of defence products and services internationally, particularly military aircraft like the Typhoon fighter jet. Rolls Royce has also risen the a ‘Phoenix from the ashes.’
In 2023-24, defence spending by the UK Government supported over 430,000 jobs across the UK, the equivalent to one in every 60. 68% of defence spending goes to businesses outside London and the South East, bolstering regional economies from Scotland to the North West. These numbers should inevitably increase.
Unfortunately, as with many companies from an array of sectors in the UK are dramatically undervalued in comparison to their peers in the US – sometimes as much as 30%. Also the likes of Germany, France and Italy are very protective towards predators trying to buy up assets on the cheap. This has not been the case here in Old Blighty. UK defence companies such as Meggitt, Cobham, Ultra Electronics and Laird have surrendered to the charms and bulging money bags of private equity. The investment community in the US have vast tentacles and dislike the idea of turning down what they consider to be a bargain.
Admittedly these companies, which have been acquired, have largely maintained their factories and offices here in the UK. However, investors have been denied their profits and shareholder value. Significantly more tax could well have been gleaned from these companies, which could have gone towards our depleted public services, had they maintained UK ownership.
On Monday, Chemring, which makes devices globally that repel enemy attacks especially for Typhoons and F-35s, received an unsolicited £1 billion from Bain Capital of Boston. It was rejected out of hand, grossly undervaluing the company. Expect Bain to raise its bid. Let’s hope for the sake of the UK’s defence industry it fails.
In recent times BAE Systems has put in brilliant efforts, though in the last year the shares were up 13.9%, but 130% in the last 5 years. Rolls Royce rallied strongly last year adding 95% in value, admittedly from a very trashed level, the Derby titan having undergone dramatic changes and reform. Babcock international’s shares are up 35% in the last year. Qinetiq over the same period saw it shares add 10.17% in value.
Set out below are some performances in the last year of some of our international peers. US defence operators in the US such as Northrop Grumman, Lockheed Martin, General Dynamic, RTX and Boeing have been folklore. So drawing comparison have little value.
Had international investors not had to pay heed to ESG’ ethical investing, many of these companies may have received greater support. Some investors have been frustrated at having to ‘cut off their noses to spite their faces.’
The past year’s performance - THALES (France) +41.4%, RHEINMETALL (Germany) +137.5%, LEONARDO (Italy) +98.5%, JAMCO (Japan) 33.8%, TOKYO KEIKO (Japan) +24.4%.
Let’s hope the planned trade deal between the US and the UK, currently being cobbled together comes to fruition, unfettered by tariffs. That being the case the defence sector could be a decent ‘Arfur Daley’ to keep an eye on.
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David Buik is LBC's Markets Commentator
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The views expressed are those of the authors and do not necessarily reflect the official LBC position.
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