UK Infrastructure and Defense: Hidden Gems in the £113bn Spending Surge

The UK's 2025 Spending Review, led by Chancellor Rachel Reeves, has set the stage for a seismic shift in capital allocation, with a £113bn boost over four years targeting infrastructure, defense, and energy projects. While headlines focus on headline-grabbing cuts to policing and local government budgets, the review also creates underappreciated opportunities in sectors poised to benefit from long-term government spending. From nuclear energy to transport upgrades, these areas are ripe for investment despite near-term economic volatility.

Infrastructure: Betting on Sizewell C and Transport Networks

The £14.2bn Sizewell C nuclear power plant in Suffolk is a cornerstone of the review, symbolizing a bold pivot toward energy independence and net-zero goals. The project's scale—creating 10,000 jobs and powering 6 million homes—could catalyze a broader nuclear renaissance. While critics cite risks of cost overruns, the Treasury's decision to classify such projects as “financial assets” (thereby reducing their impact on deficit metrics) underscores their strategic priority.

Transport infrastructure is another key beneficiary. The £15bn allocated to rail, road, and tram projects outside London—such as potential upgrades to the Liverpool-Manchester rail corridor—targets regional economic disparities. Firms with expertise in regional transport projects, such as rail signaling systems or smart infrastructure, could see steady demand. Meanwhile, the extension of the £3 bus fare cap until 2027 signals sustained government backing for public transit, favoring operators like National Express or Stagecoach.

Defense: A Stealth Growth Sector

Defense spending is set to rise to 2.5% of GDP by 2027, a reversal of decades of decline. While the focus is often on headline-grabbing hardware like fighter jets, the underappreciated opportunities lie in support industries. For example:
- Cybersecurity firms (e.g., Darktrace) could benefit from defense networks' digital modernization.
- Logistics and supply chain specialists (e.g., global contractors like Babcock International) may secure contracts for maintenance and equipment upgrades.

The review's emphasis on nuclear submarine bases (e.g., £250m for HMNB Clyde in Scotland) also highlights opportunities for firms involved in naval infrastructure and advanced manufacturing.

Fiscal Sustainability: Navigating Borrowing Costs and Tax Risks

The review's Achilles' heel is its reliance on rising borrowing costs, with UK 10-year yields at 5.2%—a decade-high. This strains the Treasury's “iron-clad” fiscal rules, which aim to balance day-to-day spending by 2029/30.

Analysts warn of inevitable tax hikes to plug gaps, but investors should focus on asset-backed sectors insulated from austerity. Infrastructure and defense projects, often funded through public-private partnerships or long-term grants, offer more predictable cash flows than discretionary spending areas like policing.

Investment Thesis: Resilient Sectors in a Volatile Market

1. Nuclear Energy and SMRs:

2. Rolls-Royce (or equivalents) could thrive as it leads Small Modular Reactor (SMR) development, backed by £6bn in government funding. SMRs' scalability and private-sector partnerships (e.g., datacenter power solutions) offer a growth trajectory under the radar of traditional utilities.

3. Regional Transport Contractors:

4. Firms with pipelines in non-London infrastructure (e.g., Midlands rail upgrades) may outperform. Look for companies with exposure to shovel-ready projects and local government partnerships.

5. Defense Tech and Cybersecurity:

6. Defense spending's shift toward modernization (e.g., AI-driven systems, cyber defense) could reward niche players. Cybersecurity firms with government contracts are particularly compelling.

Risks to Consider

• Political Uncertainty: The review's success hinges on interdepartmental compromises (e.g., housing vs. defense). A leadership change or fiscal slippage could disrupt timelines.
• Project Delays: Nuclear and transport projects often face delays, which could strain equity valuations.

Conclusion: A Long Game Worth Playing

While the UK's fiscal tightrope walk is undeniable, the Spending Review's capital allocations are a multi-year bet on growth. Sectors like nuclear energy, defense tech, and regional transport infrastructure offer durable opportunities, shielded by government guarantees and strategic necessity. For investors, these areas are not just resilient—they're foundational to the UK's economic renewal. As borrowing costs and tax debates dominate headlines, the smart money is on the underappreciated builders of tomorrow's Britain.

Investment recommendation: Overweight equities in nuclear energy supply chains, regional transport infrastructure, and defense modernization. Maintain a watchful eye on fiscal policy updates and project execution timelines.