Five major South Korean defense stocks rose an average of 22.7% year-to-date through the closing on the 16th, underperforming the KOSPI index's 61.9% gain over the same period. The stocks—Hanwha Aerospace, Hyundai Rotem, Korea Aerospace Industries, Hanwha Systems, and LIG Nex1—had surged following the outbreak of the US-Iran war in late February but have since declined 30-64% from their March-April peaks. Analysts attribute the recent weakness to concerns that the prolonged Middle East conflict may delay contract signings due to fiscal pressures and project uncertainty in client nations. Geopolitical tensions typically drive defense stock rallies on expectations of increased weapons demand and defense budgets, but the war's extension beyond four months has shifted market focus to execution risks.
Korean Defense Stocks Post 22.7% Gain Year-to-Date Through the 16th
According to the financial investment industry and Korea Exchange on the 19th, the closing prices of the five major defense companies—Hanwha Aerospace, Hyundai Rotem, Korea Aerospace Industries, Hanwha Systems, and LIG Nex1—on the 16th showed a simple average increase of 22.7% compared to the end of last year. Over the same period, the KOSPI rose 61.9% from 4,214.17 to 6,820.60, making the defense stocks' gain rate approximately 39 percentage points lower.
By individual stock, Hanwha Aerospace rose only 0.21% from 941,000 won at the end of last year to 943,000 won on the 16th. Hyundai Rotem fell 15.38% from 187,900 won to 159,000 won. Korea Aerospace Industries rose 30.42% from 114,400 won to 149,200 won, and Hanwha Systems increased 20.40% from 54,400 won to 65,500 won. LIG Nex1 rose 77.91% from 421,000 won to 749,000 won, the only stock among the five to exceed the KOSPI's gain rate.
Stocks Decline 30-64% From March-April Peaks
The stocks did not show consistent weakness throughout the year. After the war between the US and Iran broke out following attacks by the US and Israel, Hanwha Aerospace surged to 1,655,000 won on March 4, setting a 52-week high. It then closed at 943,000 won on the 16th, down 43% from the peak. Hyundai Rotem fell 44% compared to its high of 282,000 won recorded on April 30. Korea Aerospace Industries dropped 31% from its peak of 215,500 won on March 3.
Hanwha Systems plunged 64% from 184,000 won recorded on March 4, and LIG Nex1 also corrected 33% from its peak of 1,118,000 won on April 22. The simple average decline rate from the peaks for the five defense companies reaches 43%.
Analysts Cite Middle East War Prolongation as Key Weakness Factor
This month, as the ceasefire memorandum of understanding (MOU) between the US and Iran was effectively scrapped and merchant ship attacks and retaliatory airstrikes around the Strait of Hormuz continued, defense stocks have failed to find clear upward momentum. Securities firms cite the prolonged Middle East war's potential to delay local contracts, large order gaps, and concerns about NATO market entry barriers following the failure to win the Canadian submarine project (CPSP) as backgrounds for the recent weakness in defense stocks.
Kang Tae-ho, a researcher at DS Investment & Securities, analyzed in a report that "the prolongation of the Iran war is acting as a negative factor for the Korean defense industry, which has multiple pipelines in the Middle East." This means that concrete discussions on contracts are possible only when the Middle East situation stabilizes. He added, "The part the market is most worried about is the delay in new orders," and "to secure the long-term performance of Korean defense companies, all five companies need continuous orders."
Choi Jeong-hwan, a researcher at Daishin Securities, told Yonhap News in a phone call, "Domestic defense companies' Middle East business can accelerate when the war ends, but as uncertainty around the Strait of Hormuz continues, Middle East countries also appear to be feeling financial burden." He explained, "The Middle East is a major market for domestic defense companies, and as there are no signs of the war ending, concerns that Middle East-origin orders may be delayed are being reflected in stock prices."
Analysts also note that prolonged war does not unconditionally act as a positive factor for shipbuilding companies pursuing naval vessel projects. Kim Yong-min, a researcher at Yuanta Securities, said, "When war breaks out in a peaceful state, defense-related stock prices surge and overshooting appears, but it is difficult to continue accepting a prolonged war as a new positive factor."
Regarding the failure to win orders after Hanwha Ocean and HD Hyundai Heavy Industries competed as 'one team' for CPSP orders but Canada selected a German shipbuilder as the preferred negotiator, securities firms maintain an atmosphere of 'regrettable but not to be over-interpreted.' This means there is no need to expand the interpretation of the Canadian submarine project's order failure to a limit on domestic defense companies' entire NATO market entry.
Brokerage Firms Highlight Second-Half Order Prospects in Europe and US
Analysts note that while recent stock prices have been pressured, the performance and long-term order environment of defense companies have not been damaged. This is because in the second half of this year, order results may come out successively from regions other than the Middle East, such as Spain's K9 self-propelled howitzer joint development project and US bids.
Choi said, "Currently, defense stock prices are considerably pressured, and there is no burden at all in terms of fundamentals." He added, "In the second half, there are orders that can be expected from regions other than the Middle East, and there is also a seasonal tendency for orders within the defense industry to concentrate in the second half."
FAQ
Why did Korean defense stocks underperform the KOSPI index year-to-date?
The five major Korean defense stocks rose an average of 22.7% year-to-date through the closing on the 16th, while the KOSPI index gained 61.9% over the same period. Analysts attribute the underperformance to concerns that the prolonged US-Iran war, which began in late February, may delay contract signings in the Middle East due to fiscal pressures and project uncertainty in client nations.
What happened to Korean defense stocks after they peaked in March and April?
After surging to 52-week highs in March and April following the outbreak of the US-Iran war, the five major defense stocks declined 30-64% from their peaks as of the closing on the 16th. Hanwha Aerospace fell 43% from its March 4 peak, Hyundai Rotem dropped 44% from its April 30 high, and Hanwha Systems plunged 64% from its March 4 peak.
