[Industry Introduction for Stock Beginners] Rising Alone While Others Fall... The War Beneficiary: ‘Defense Industry’

Since I am a journalist in charge of the stock market, I must look into the KOSPI and KOSDAQ markets every day. I have to deliver the news to you, the readers, about which stocks rose or fell every time the market opens at 9:00 AM and closes at 3:30 PM.

However, there have been some very interesting stocks lately. These are sectors that fall alone when everyone else is rising, and rise alone when everyone else is falling. These are the defense industries—companies that sell weapons. The reason is simple: war. 

Normally, when a war breaks out, the stock market tends to crash. People try to avoid the uncertainty caused by war and gather safe assets like the US dollar and gold. In other words, since they don't know what will happen next, they move their money into assets with less volatility. In that process, funds invested in risky assets like stocks pour out like an ebbing tide, and stock prices drop. This US-Iran war took place on February 27–28, Korea time. The KOSPI, which had been happily breaking record highs from 4,309.63 at the beginning of the year to 6,244.13 on February 27, plummeted 18.43% in just two trading days, reaching 5,791.91 on March 3 and 5,093.54 on March 4.

Let’s look at March 3, the first day the war was reflected in the domestic stock market. On this day, Samsung Electronics was -9.88%, Hynix was -11.5%, Hyundai Motor (Automobiles) was -11.72%, Doosan Enerbility (Nuclear Power) was -8.84%, LG Display (IT) was -10.32%, Hanwha Ocean (Shipbuilding) was -4.11%, Kakao (IT) was -9.79%, Hyundai Engineering & Construction (Construction) was -8.62%, and KB Financial Group (Banking) was -3.46%. Literally, every industry fell without exception.

However, defense stocks actually surged. Hanwha Aerospace +19.83%, Hanwha Systems +29.14%, LIG Nex1 +29.86%, Hyundai Rotem +8.03%, and Korea Aerospace Industries +3.19%. The logical structure is simple: "A war broke out -> Companies that sell weapons will likely make a lot of money."

These are the fluctuation rates of major KOSPI stocks on March 3. While everyone else was falling, only defense stocks—Hanwha Aerospace, Hanwha Systems, LIG Nex1, Korea Aerospace Industries, and Hyundai Rotem.

Conversely, what if there are signs that the war is ending? Since it seems the demand for weapons will no longer increase, defense stocks plummet. Watching this in real-time is nothing short of a comedy. If news arrives overnight that the US and Iran are reaching a ceasefire, defense stocks show weakness. But as soon as news flies in that Iran fired a missile or the US struck somewhere, they rise like crazy. Of course, other stocks like semiconductors, automobiles, nuclear power, and banking move in the opposite direction of defense as if on cue.

Then, can war really grow the performance of defense companies? I think the possibility is very high. The core point is not "a war has broken out now," but rather "the empty arsenals after the war must be refilled."

The Arrival of the Era of Self-Reliant Defense

The global security landscape has now entered a phase of "every man for himself." It means, "I don't know about others, but I must survive first." Until now, the US has played the role of the world's police. Whenever so-called "troublemaker" nations caused problems, the US beat them down or deterred them from causing problems in the first place by stationing troops and deploying weapons all over the world.

However, President Trump’s thinking is different. He wondered, "Why should we protect other countries, especially using our own money?" They spend a huge amount of money and get very little in return. Especially after going through this Iranian war, the idea that there is no need to protect them must have become stronger. He requested troop deployments from allies, including South Korea and Europe, but everyone remained indifferent.

From the beginning of his term, President Trump pressured allies to share the burden of defense costs. European countries succumbed to this pressure. In June of last year, NATO countries announced a joint statement in The Hague, Netherlands. The content was that they would spend 5% of their GDP on defense by 2035. They had agreed on 2% back in 2014, so this is a scale that far exceeds double that amount. It was exactly as President Trump demanded.

Of course, Europe's own will seems to have been reflected here to some extent as well. Since the US says it won't protect them, what choice do they have but to spend more money to fill their arsenals and grow their troops? Furthermore, Europe shares a border with Russia. Just as Ukraine suffered, Russian troops could drive tanks and invade at any time. Europe is already establishing defense plans based on the assumption of a Russian re-invasion.

During the Russia-Ukraine war, Europe provided weapons to Ukraine on a massive scale, even emptying their own arsenals. Now, they have to refill them while increasing defense spending. However, the problem is that Europe has almost no capacity to produce weapons. After World War II and the end of the Cold War, they closed or consolidated all their production facilities. Since there were no weapon orders, there was no reason to maintain production lines, and skilled personnel retired or moved to other industries. They switched to a system of making small quantities only when needed, rather than manufacturing and stockpiling. There was no need for them to make them themselves since the "Superpower" (US) was protecting them.

But now the situation has changed. How do they fill what they cannot make? In the end, they have to buy them from somewhere. Experts judge that the source of procurement is very likely to be South Korean defense companies. Their technology is excellent, they meet delivery deadlines promptly, and they are cheaper than US weapons. In other words, the cost-effectiveness is amazing.

In this Iranian war, an interceptor missile called Cheongung-2 received great attention worldwide. Iran kept firing missiles at the UAE, and they succeeded in intercepting all of them. According to UAE Ministry of Defense data, the UAE air defense batteries, which included Cheongung-2, successfully intercepted 486 out of 507 Iranian ballistic missiles (95.9%). For cruise missiles, it was 24 out of 24 (100%), and for drones, it was 2,101 out of 2,191 (95.9%).

The stock price of LIG Defense & Aerospace (formerly LIG Nex1), which made the Cheongung-2, rose 49.12% in just one week after the outbreak of the war. It went from 509,000 KRW to 759,000 KRW. The sentiment was, "Wow, this is a hit. Countries all over the world will start buying this. Their performance will increase tremendously."

Even now, we must consider the situation of a war between the US and China. An analyst once said that in human history, the period without war accounts for only 3%. All history has been written through war. That is true.

Then, which companies are promising? If you say, "Wars will continue and defense is promising, so I'll just invest in any of the four major companies," that would be frustrating. Each company has its own strong field. You must also consider characteristics such as 1. The Iranian war, centered on air combat and bombing, and 2. The Russian war, centered on armored vehicles, tanks, and infantry. We will look into this in the next post. To explain briefly, LIG Nex1 is a company that makes missiles, Hyundai Rotem makes tanks, and Korea Aerospace Industries makes fighter jets. Hanwha Aerospace is a comprehensive system company that encompasses all of these, making it the leader in the defense industry.