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Over the past 18 months, the Rolls-Royce (LSE:RR) share price has notably outperformed both the FTSE 100 and the broader market, reflecting a significant turnaround for the British engineering firm. This period of positive performance has drawn considerable attention to the company. However, the recent Labour government’s ascent to power, which began in early June, introduces both new opportunities and potential challenges for Rolls-Royce.
Three key areas where Labour's influence might impact Rolls-Royce are:
Defence Spending
Defence constitutes approximately 25% of Rolls-Royce’s sales, with the company providing propulsion systems for military vehicles rather than munitions. The current geopolitical climate, including heightened tensions with Russia and assertive actions by China, has led to increased Western commitments to defence spending. The Labour government has pledged to raise the UK's defence expenditure to 2.5% of GDP. While there is no specific timeline for this increase, Labour has indicated that it will accelerate the process compared to the previous Conservative administration. This could benefit Rolls-Royce, given its substantial role in long-term defence programmes like AUKUS and Tempest.
Small Modular Reactors
Rolls-Royce is among the companies shortlisted to develop small modular reactors (SMRs), a key component in the UK's plan to boost nuclear energy capacity to 24 GW by 2050. Although the Labour Party’s exact stance on SMRs is not fully clear, Rolls-Royce appears well-positioned in this sector. The company has already secured development grants and stands to gain significantly if it continues to advance in this field. A final investment decision may not be reached until the end of the decade, but SMRs could become a major revenue stream for Rolls-Royce from the 2030s onwards.
Union Relations
Rolls-Royce has faced numerous challenges with union actions, including recent strikes that have disrupted operations. The Labour government, with its roots in the union movement, is expected to prioritize workers' rights and potentially strengthen union influence. This shift could alter the dynamics between Rolls-Royce and its workforce, potentially affecting the company’s pay structures and profitability.
In summary, while Rolls-Royce's recent performance has been strong, the new political landscape under Labour could introduce both advantages and obstacles, particularly in areas related to defence spending, nuclear energy, and labour relations.
