Defence stocks jumped on Tuesday after new Prime Minister Andy Burnham named John Healey as his Chancellor, a move investors read as a signal of a bigger military budget.
Babcock International PLC (LSE:BAB), the engineering group that runs Devonport Dockyard and maintains the army's vehicle fleet, led the FTSE 100 with a 7.5% gain to 1,115 pence. BAE Systems PLC (LSE:BA.), Britain's largest defence contractor, rose 3.3% to 1,938.25 pence.
And QinetiQ Group PLC (LSE:QQ.), the FTSE 250 group that trains RAF pilots and tests weapons systems, climbed 4% to 470 pence.
The rally followed Healey's surprise elevation to the Treasury, a name barely mentioned in speculation about the post.
Healey has repeatedly called for defence spending to rise to 3% of gross domestic product.
He resigned as defence secretary earlier this month in protest at a funding package he judged insufficient, and has backed the idea of war bonds to cover extra military costs.
Investors saw a clear read-across from his appointment to a higher defence budget, driving the sector sharply higher.
Some caution lingered, however, over whether Burnham can find the money given tight fiscal constraints.
Analysts have noted the annual defence funding shortfall implied by Healey's earlier objections appeared to be less than £4 billion.
There is nonetheless a growing consensus around a new fiscal compact to fund defence over the long term, implying higher borrowing and possible welfare cuts.
The question is whether Burnham has the appetite to deliver the latter.
The gains for defence names lifted the FTSE 100 out of the red, leaving it unchanged on the day.
