Defense stocks on rally as North Korea enters Russia's war

As tensions rise, South Korean defense stocks surge, driven by foreign investments in major arms suppliers. Analysts expect continued growth.

Russian President Vladimir Putin, left, and North Korean leader Kim Jong-un shake hands during their meeting in Russia on Sept. 13, 2023. [AP/YONHAP]

As tensions rise between the two Koreas following the North's dispatch of troops to Russia, defense stocks in the South are on a rally.

Foreign investors have been fueling the uptrend by picking up shares of South Korean arms dealers, including the country’s four major suppliers — Hanwha Aerospace, Korea Aerospace Industries (KAI), Hyundai Rotem and LIG Nex1. Foreigners have been net sellers of Korean stocks since August.

The year-to-date gains of Kospi-listed Hanwha Aerospace share price stand at 195.8 percent as of press time. It has risen 28.3 percent over the course of October and closed at 381,000 won ($274.85) on Tuesday, up 0.93 percent from the previous trading day.

Hyundai Rotem saw year-to-date gains of 142.5 percent, closing at 64,500 won on Tuesday, up 1.42 percent from the previous session. LIG Nex1 rose 90 percent during the cited period, although it closed slightly lower from Monday’s session at 248,000 won, down 0.2 percent.

KAI soared as much as 8.3 percent midtrading before closing at 57,800 won on Tuesday, up 4.33 percent from the previous trading day, partly driven by a strong quarterly earnings report. This year to date, KAI’s share price has increased 15.6 percent on a year-to-date basis.

In October, Hanwha Aerospace ranked second in terms of the net purchase volume by foreign investors at 281 billion won, following SK hynix. Foreigners net bought KAI shares worth 97.5 billion won, LIG Nex1 shares worth 54.5 billion won and Hyundai Rotem shares worth 31.9 billion won.

Amid the growth of global military spending, anticipation of additional arms export deals with European nations partly drove investors’ interest in Korean arms stocks, especially given escalating tension surrounding Pyongyang’s deployment of troops to Russia.

“North Korea’s involvement in the Russia-Ukraine war pushed [defense share prices] upward, coupled with the South Korean government reviewing potentially providing military support to Ukraine in response,” noted Shinhan Securities analyst Kang Jin-hyeok.

President Yoon Suk Yeol hinted at the possibility of providing direct military aid to Ukraine, saying the government would review its current policy, under which it does not directly supply lethal weapons ,“more flexibly depending on North Korea's military activities,” during a joint news conference with Polish President Andrzej Duda in Seoul on Oct. 24,

Yang Seung-yoon, an analyst at Eugene Investment & Securities, projected that “the market environment for the domestic defense industry will remain relatively favorable compared to other sectors regardless of who wins the U.S. presidential election,” adding that “Trump’s win would further drive geopolitical uncertainty while also boosting defense demand for U.S. allies.”

Given those market conditions, Hanwha Asset Management aims to launch an exchange-traded fund (ETF) tracking domestic defense stocks, dubbed the Hanwha PLUS K-Defense Industry ETF, on the New York Stock Exchange next year.

“The operating profits of arms companies included in the upcoming K-defense ETF are expected to continue on their growth path next year,” said Seol Tae-hyeon, an analyst at DB Financial Investment.

“Considering the optimistic earnings outlook for Korea’s key defense suppliers, favorable investment momentum can be expected, both domestically and globally, with the listing of the ETF.”

BY SHIN HA-NEE [shin.hanee@joongang.co.kr]