Drones, AI, space: where to invest amid defence tech boom
The world is rearming at a dizzying pace.
Global defence spending has surged at an annual rate of 4.2 per cent since 2020 – that’s four times faster than pre-pandemic levels, according to the Stockholm International Peace Research Institute.
By 2030, that figure is expected to hit $3.4tr, reflecting rising geopolitical tensions and the race for tech superiority.
In the UK, last week’s Spring Statement made it clear that defence technology has become central to the country’s economic and industrial strategy.
Prime Minister Keir Starmer also committed to raising defence spending to 2.5 per cent of GDP by 2027 – the biggest increase since the Cold War – signalling the UK’s intent on leading the global defence tech race.
For investors, this rapid transformation presents significant opportunities.
The future of combat
Drones and artificial intelligence are rapidly reshaping the battlefield. From autonomous surveillance systems, to AI-driven cyber security, the UK is positioning itself as a pacesetter in generation military technology.
The government’s new £400m defence innovation fund aims to fuel these efforts, ensuring that cutting-edge technology moves swiftly from lab to front line.
“With 10 per cent of the MoD’s budget allocated to novel technologies like drones and AI, we’ll see faster to go market times and stronger sovereign capabilities”, said Tanya Suarez, head of the Janus accelerator.
Although the government’s defence spending strategy includes attracting smaller startups in emerging technologies, some experts argue that investors should focus on more established defence firms.
“Changes to the ministry of defence’s (MoD) procurement system should enable more smaller firms to compete for government contracts in the future”, said Jason Hollands of wealth manager Evelyn Partners. “But many of them will be private companies and therefore hard to invest in”.
Ben Kumar, head of equity strategy at Seven Investment Management, shares this view. He said that investors should focus on firms like Babcock International and QinetiQ, both of which have seen major wins and stand to benefit from increased defence spending.
Investing in space tech
Space is becoming a crucial military theatre, and so space tech is set to attract significant attention from investors.
With satellites providing vital intelligence, navigation and communications, sovereign space capabilities have become a priority for defence planners.
Volodymyr Levykin, rocket firm Skyrora’s chief executive, said that “investment in defence should automatically mean investment in space”.
Tech-driven sovereign launch systems are becoming crucial to reducing our reliance on third parties for military satellite operations.
The UK’s pivot towards a space-based defence system could drive opportunities in firms like BAE systems, QinetiQ, and Cohort. Meanwhile, a wave of smaller, cutting-edge firms could become acquisition targets for larger players.
UK defence tech stocks to watch
QinetiQ
QinetiQ is one of the UK’s most advanced defence tech firms, specialising in robotics, surveillance and electronic warfare.
Originally formed in the UK’s defence evaluation and research agency in 2001, the company has since grown into a global heavyweight.
The company has recently shown strong revenue growth, with its latest results reporting a 15 per cent increase in orders to £1.8bn, and an organic revenue increase of 10 per cent.
Despite this, shares in QinetiQ have under-performed recently, down three per cent over the past three months due to contract delays in the UK and US.
Yet, Susannah Streeter, head of money and markets at Hargreaves Lansdown, said the firm could be a key beneficiary of the government’s defence push.
“Its specialisms in advanced materials, cyber capabilities and analytics are all defence areas Labour wants to focus on”, she said.
While contract delays could cause a £30m hit to its bottom line this year, its current share price of just below £4 could be an attractive entry point for long-term investors.
Babcock International
Babcock International is a major defence contractor specialising in naval engineering and submarine maintenance.
The company plays a crucial role in the UK’s maritime defence strategy, supporting the Royal Navy’s fleet – including its nuclear powered submarines and aircraft carriers.
Earlier this week, Babcock received a £1bn boost after securing a five year MoD contract to maintain military equipment for the British Army.
Chief executive David Lockwood said: “In a period of increased global instability, more is being expected of our armed forces. This contract extension ensures that Babcock continues to provide the British Army with the tools to do its job.”
The government’s increased defence spending should create even more opportunities for the firm.
Despite concerns that the sector-wide rally could slow down, Babcock’s shares remain attractively valued even after a 49 per cent increase over the past three months.
Cohort
Cohort is a smaller, yet highly specialised defence tech firm which focuses on electronic warfare, communications, and cyber security.
The firm operates through six subsidiaries that provide advanced surveillance and secure communication systems for the MoD and international allies.
Cohort’s order book now exceeds half a billion pounds, with deliveries now extending out to 2037 – highlighting its long term revenue potential.
Beyond QinetiQ, Babcock and Cohort, other defence tech stocks investors should consider include missile system provider Chemring Group, aerospace firm Melrose Industries, and military jet engine maker Rolls Royce Holdings.
Despite marine tech firm SRT Marine systems’ small market capitalisation of £115m, analysts believe that it could thrive if the UK invests in rebuilding the Royal Navy.
Investor takeaway
The UK’s renewed focus on defence tech has placed these firms at the forefront of the country’s modern industrial strategy.
Meanwhile, emerging areas like directed energy weapons and AI-powered defence solutions, are opening up new opportunities for investors willing to bet on the future of warfare.
As European defence budgets continue to rise, these stocks offer a compelling mix of growth potential and government-backed stability – making them key considerations for investors looking to capitalise on the defence tech boom.