Tuesday, November 19

Asia’s arms makers and naval shipbuilders are leading a global surge in defence stocks this year as investors bet that the region’s companies are primed to lead a rearmament boom.

Triple-digit share price increases for big arms companies listed in South Korea and Japan have pushed them into the top 20 gainers on the MSCI All-Country World index for 2024, as defence-related stocks have gone on the march globally from Norway to Brazil this year.

The share moves underline a darkening in the global security order. US allies in Europe and Asia are bracing for Donald Trump’s second presidency to push them to pay more for their own defence. Threats from Russia and China have already forced a reversal in decades of cuts to arms budgets.

Shares in Hanwha Aerospace, South Korea’s largest defence group, have tripled this year to a market value of nearly 18trn won (close to $13bn), leaving them in dollar terms just behind Nvidia among the MSCI All-Country World’s biggest gainers.

“Given the shifting geopolitical calculus and heightened risks of conflict, an isolationist US policy could propel countries toward more localised defence spending and the seeking of alternatives, widening doors for Asia defence contractors that offer faster delivery lead times and cost competitiveness,” JPMorgan analysts said.

Defence stocks have also performed strongly in other parts of the world outside the US. Shares in Germany’s Rheinmetall have almost doubled this year to a market value of €25bn, while Norway’s Kongsberg and Brazil’s Embraer have both risen about 150 per cent, as orders for shells, missiles and military transport jets flow in.

Bar chart of Top aerospace and defence gainers on MSCI All World index (US dollars, % rise year to date) showing Defence stocks are booming

Big US defence names such as Lockheed Martin, General Dynamics and Northrop Grumman have meanwhile lagged the S&P 500’s gains this year.

Asia’s contractors are being seen as particular beneficiaries of governments that need to rearm quickly, on the cheap, and outside an increasingly uncertain US security umbrella.

Hanwha has built up a $22bn book of orders including exports of howitzers and rocket artillery to Nato countries that are stocking up after Russia’s invasion of Ukraine. It is aiming to double sales of land arms to Europe in the next three years after exports drove a quintupling in operating profit in the third quarter versus a year ago.

South Korea broke into the world’s top 10 arms-exporting countries last year, according to the Stockholm International Peace Research Institute. A push to be fourth by 2027 has created opportunities for the country’s defence industry, known collectively as K-Bangsan.

Hyundai Rotem, which is selling tanks to Poland, has risen about 140 per cent versus a fall in the Kospi benchmark this year.

Mitsubishi Heavy Industries, Japan’s biggest defence contractor which manufactures battle tanks, submarines, surface ships and fighter jets, has gained more than 180 per cent in Tokyo this year to a market value of 7.8trn yen ($50bn), versus a 14 per cent increase for the Topix index.

Kawasaki Heavy Industries, Japan’s second largest defence contractor, is up 100 per cent. IHI, a key supplier of jet engines and rocket systems, up over 200 per cent, is the third best performing stock on the Topix.

Japan is set to increase defence spending to a record $59bn in the next fiscal year, after it abandoned a cap on military expenditure of 1 per cent of GDP.

Japanese and Korean industrial firms and shipbuilders with defence arms also stand to benefit from shifts in global energy use, from LNG vessels to demand for electrical power equipment and turbines for grids.

Other Asian states want to use local arms orders to build homegrown technological prowess, said Archie Hart, portfolio manager in emerging markets equities at Ninety One.

“Rather than buying overseas arms, they want to invest in indigenous technology and manufacturing,” Hart said. “They see it as buying arms but also as developing an indigenous high-tech sector.”

In India, state-owned Hindustan Aeronautics and Bharat Electronics have outperformed domestic stock benchmarks, with the latter rising to become the Nifty index’s third biggest gainer in 2024. In Singapore ST Engineering, a maker of fighting vehicles and patrol vessels, is a top 10 performer.

This year’s defence share boom has divided investors. Many avoid the sector altogether for ethical reasons or see investments in particular firms as likely to fall afoul of geopolitical tensions. “There are a lot of defence companies we wouldn’t invest in under any circumstances,” such as Chinese names, Hart said.

Listed arms of China’s state-owned defence giants have largely risen in line with mainland Chinese share prices this year. Beijing has been focused on merging state firms to drive efficiencies.

There has been a rebound in companies associated with China’s so-called “military-civil fusion” strategy of high-end dual-use technologies.

Kuang-Chi Technologies, a Shenzhen-based developer of so-called “metamaterials” that have applications such as stealth, has risen 150 per cent this year in dollar terms.

https://www.ft.com/content/48ad06d7-8629-494d-bfe5-f4f11ab57630

Share.

Leave A Reply

4 × 1 =

Exit mobile version