To date, the FTSE 100 — the index tracking the performance of the UK’s largest 100 stocks — has largely shrugged off the incoming president’s early policy announcements. However, that’s not to say we won’t see more movement as Donald Trump’s term unfolds, especially if the UK finds itself the target of American tariffs.
And with this in mind I decided to ask ChatGPT, considering its IQ is already higher than my own, which FTSE 100 stocks could benefit from Trump’s policies. The platform provided me with four answers, Ashtead Group, Sage Group, BAE Systems (LSE:BA), and Rolls-Royce (LSE:RR). Today I’m going to focus on the latter two.
Trump’s push on defence spending
ChatGPT selected BAE Systems and Rolls-Royce because they’re the two largest defence contractors in the UK. That’s important because Trump wants the US and its allies to spend more on defence. In fact, he’s called for NATO members to increase their defence spending to 5% of GDP. That’s more than doubling the current 2% target.
This demand has caused concern among European allies, with many considering it unrealistic given their economic constraints. But while Trump’s push is largely seen as a negotiating target, potentially aiming for a compromise around 3.5%, this would still represent a significant requirement for NATO members to increase defence spending. The ultimate winners here will likely be the defence contractors.
What’s more, UK-based contractors could prosper more than their European counterparts because they’re exempt from ITAR regulations. This exemption, effective since August 2024, allows for streamlined defence trade among AUKUS nations (Australia, UK, and US). UK companies in the Authorised User Community can now operate without US ITAR licenses for specified controlled articles and services. This should reduce administrative burdens and lead times.
Is Rolls-Royce a good investment?
Rolls-Royce is a quality business that has been revitalised in recent years. The company’s three main business units — civil aerospace, defence, and power systems — are all thriving and contribute to a very healthy earnings trajectory.
Interestingly the stock, despite its meteoric rise, is still trading at a discount to its American counterpart GE. While potentially resurgent inflation from Trump’s policy may have a negative impact on demand for air travel — Rolls earns a lot from service-related flying hours of its engines — it’s definitely a stock worthy of much consideration. I would consider buying more but my holding’s already substantial relative to my portfolio.
Is BAE Systems one as well?
The BAE share price is already elevated versus historical levels. And much of these gains happened at the start of Russia’s war in Ukraine. Rather than benefitting from demand for armour and ammunition, the company prospers when nations sign up to long-running defence programmes, like Tempest and AUKUS.
One risk is that it doesn’t trade with the normal British discount that we’ve come to expect — it trades with similar valuation multiples to its American counterparts. What’s more, the expected earnings growth rate isn’t as strong as Rolls-Royce. I’ve owned it, sold it too soon, and don’t expect to buy it in the near term.
