UK Stock Market Shift: Why Defence and Resources are Outperforming Consumer Goods

Recent market activity in the UK reveals a striking divergence: while consumer-facing stocks are struggling, those linked to defence and resource extraction are experiencing significant gains. This isn’t a fleeting trend, but a structural shift reflecting deeper economic anxieties and geopolitical realities.

The Consumer Crunch: A Sign of Economic Weakness

Leading UK retailers like Associated British Foods (down nearly 14% recently) and Tesco (a 6.74% drop) are feeling the pressure. Even stalwart brands like Marks & Spencer are seeing declines. This isn’t isolated to individual companies; the broader consumer discretionary sector is underperforming. The MSCI UK Consumer Staples Index has lagged significantly behind the overall MSCI UK Index, rising only 15.42 points compared to the overall index’s 25.80 point increase through December 2025.

Did you know? Consumer confidence in the UK remains stubbornly low, with the GfK Consumer Confidence Index still in negative territory despite a slight recent uptick. This suggests households are prioritizing essential spending and delaying discretionary purchases.

Inflation and the Cost of Living Crisis

The primary driver is the persistent cost of living crisis. High inflation, coupled with sluggish wage growth, is squeezing household budgets. Even with inflation easing, factors like rising public policy costs and regulatory burdens are expected to keep prices elevated. This impacts consumer spending and, consequently, the profitability of companies reliant on discretionary income.

The Christmas period, traditionally a peak for retail, saw consumers prioritizing affordability, according to the British Retail Consortium. This cautious approach signals a continuation of the trend into 2026.

The Rise of Defence and Resources: Geopolitics and Supply Chains

In stark contrast, companies like BAE Systems (up over 5% recently and 70% year-on-year) and Endeavour Mining (a 4.38% recent increase and 175% annual gain) are thriving. This surge is fueled by a combination of geopolitical instability and evolving supply chain dynamics.

Geopolitical Uncertainty Drives Defence Spending

Global conflicts and rising international tensions are prompting increased defence spending worldwide. BAE Systems, as a major arms manufacturer, directly benefits from this trend. Governments are investing heavily in military equipment and technology, bolstering the company’s order book and share price.

Resource Scarcity and the Energy Transition

The demand for critical minerals and resources is soaring, driven by the global transition to renewable energy. Companies involved in mining and resource extraction, like Endeavour Mining and Fresnillo (up a staggering 450% in 2025), are capitalizing on this demand. Supply chain vulnerabilities, exacerbated by geopolitical events, are further driving up prices and benefiting resource producers.

Pro Tip: Investors looking to capitalize on these trends should consider diversifying their portfolios to include companies involved in both the defence and resource sectors. However, remember that these sectors can also be volatile and subject to political and regulatory risks.

Looking Ahead: Will the Divergence Continue?

The structural shift observed in the UK stock market is likely to persist in the near to medium term. Unless there’s a significant improvement in the UK’s economic outlook and a substantial increase in consumer confidence, consumer-facing stocks are likely to remain under pressure.

The ongoing geopolitical landscape and the accelerating energy transition suggest continued strong demand for defence and resource-related products. However, investors should be mindful of potential risks, including regulatory changes, environmental concerns, and fluctuations in commodity prices.

The Impact of UK Economic Policy

Future UK government policies will play a crucial role. Policies aimed at stimulating economic growth, reducing inflation, and boosting consumer confidence could help revive the consumer sector. However, the effectiveness of these policies remains uncertain.

FAQ

• Why are UK consumer stocks underperforming? High inflation, the cost of living crisis, and low consumer confidence are the primary drivers.
• What is driving the rise of defence stocks? Increased geopolitical tensions and rising global defence spending.
• Is this trend likely to continue? Yes, unless there is a significant improvement in the UK’s economic outlook.
• Should I invest in defence or resource stocks? Consider diversifying your portfolio, but be aware of the inherent risks in these sectors.

Reader Question: “What impact will Brexit have on these trends?” – Brexit continues to contribute to economic uncertainty and supply chain disruptions, potentially exacerbating the challenges faced by consumer-facing businesses and further supporting the demand for domestically sourced resources.

Explore our other articles on UK economic trends and investment strategies for more in-depth analysis.

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