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A recent breakthrough in US-UK trade relations has captured the attention of British stock market investors. The new agreement scraps the implementation of tariffs on British steel and aluminium exports to the US and could breathe fresh life into several UK-listed industrial stocks.
Two key beneficiaries might be Rolls-Royce (LSE: RR.) and Melrose Industries (LSE: MRO) — both of which operate in sectors closely tied to global manufacturing and aerospace.
The shift in policy is expected to reduce costs for industrial operators, opening new export routes and improving margins for UK manufacturers. For investors seeking exposure to a potential rebound in this sector, these two FTSE-listed companies are worth considering.
An unstoppable giant
Rolls-Royce suffered in recent years, with the pandemic wiping out demand for aircraft engines and severely impacting its profits. A swift recovery ensued but US tariffs threatened to pause the growth, with the price crashing 18% in early April.
But it’s already back near a 52-week high, as the news promises to refresh its supply chain — particularly as aerospace demand picks up globally.
The world is seeing a general surge in long-haul air travel, which should support growth in engine servicing revenue – a major profit driver for Rolls. Cost-cutting efforts and a new leadership team have also helped to boost its operational efficiency.
With a fresh trade deal on the table, the promise of cheaper raw materials is likely to boost margins further.
But it’s not in the clear yet. The engineer still carries substantial debt, making it vulnerable to macroeconomic shocks or interest rate increases. Its reliance on civil aviation creates exposure to external factors like oil prices, geopolitical tensions and potential airline bankruptcies.
So while these signs of recovery are encouraging, the stock remains cyclical and could still suffer losses. As such, many investors view Rolls as a high-risk, high-reward opportunity. To prove its recovery is here to stay, it must return to consistent profitability and continue dividend payments into the medium term.
A renewed approach
Melrose Industries is another stock that’s likely to enjoy a boost from the new tariff deal. It was known for following a ‘buy, improve, sell’ model, operating businesses with exposure to both the automotive and aerospace sectors. But after the sale of GKN’s automotive arm, it’s now focused on aerospace – a segment that could see improved demand in the coming months.
In its H2 2024 results it posted a profit of £31m after years of losses, with its net margin turning positive at 1.8%. Now slimmed down and more focused, the company looks set to deliver greater shareholder returns with improved margins and increased cash flow. It enjoys strong management and has a track record of turning around underperforming industrial assets.
The stock has exhibited some volatility in past years, reflecting its exposure to cyclical industries. These days it faces risks from delays or cancellations in aircraft programmes, supply chain issues and environmental factors affecting air travel demand. And while aerospace demand is improving, it’s still vulnerable to geopolitical issues that could impact growth.
The UK stock market’s response to the new trade deal reflects optimism about improving transatlantic relations and a potential rebound in British manufacturing. For investors enthusiastic about an industrial recovery, these shares may be worth considering as the trade winds shift in the UK’s favour.
This story originally appeared on Motley Fool
