Following the Ukraine War, the 4th Taiwan Strait Crisis... South Korean Defense Stocks Rise Further

Escalation of the 4th Taiwan Strait Crisis
Asian Countries Expected to Increase Defense Spending

European Defense Budgets Rise Due to Ukraine War
Domestic Defense Companies Surpass 2017 Profit Peak Over 12 Months

Korea Aerospace, Hanwha Aerospace, LIG Nex1 Stocks Soar This Year

[Asia Economy Reporter Ji Yeon-jin] As geopolitical crises continue to escalate, including the war between Russia and Ukraine and rising tensions between the US and China over Taiwan, defense stocks are expected to benefit.

According to Korea Investment & Securities on the 19th, the fourth Taiwan Strait crisis triggered by US House Speaker Nancy Pelosi's visit to Taiwan is expected to lead Asian countries to increase their defense budgets in response to China's military threats.

Since the establishment of the Taiwan government in 1949, three Taiwan Strait crises have escalated. The first to third Taiwan Strait crises ended as incidents reinforcing the "One China" principle to the US by China. Subsequently, the US maintained strategic ambiguity toward Taiwan, considering China's extreme backlash.

However, following Speaker Pelosi's visit, China launched 11 ballistic missiles on the first day of military exercises and attempted to neutralize the median line of the Taiwan Strait. This served as a reminder worldwide that China, following Russia, could also engage in military demonstrations.

Since the beginning of the year, the war in Ukraine has led Europe to increase defense spending. For example, Germany announced plans to raise its defense budget to 2% of its Gross Domestic Product (GDP) by 2024, and Poland has expanded imports of Korean-made weapons. Researcher Jo Soo-min of Korea Investment & Securities stated, "The fourth Taiwan Strait crisis will create movements in Asia to respond to China's military threats," adding, "This is in the same context as European countries establishing defense strategies against Russia due to the Ukraine situation."

As geopolitical risks spread from Europe to Asia, the global defense market is also expected to grow rapidly.

Since 2017 until last year, South Korea has exported weapons to the United Arab Emirates (UAE), Saudi Arabia, Turkey, India, Oman, Iraq, and Indonesia. These countries all have low industrial maturity and prefer cost-competitive weapons. Given that Asian countries likely to increase defense spending due to the current geopolitical crisis also prioritize price competitiveness, this could be a positive factor for the Korean defense industry.

This year, the domestic defense industry surpassed the 2017 peak in 12-month profit forecasts as European weapons exports increased following the Ukraine crisis. Defense exports involve contracts delivering products over the long term, with export contracts reflected in profit estimates with a time lag. Considering that orders from Europe and Asia are added to profit estimates, there is still room for stock price growth based on the profits of domestic defense stocks.

While the KOSPI index fell 15.8% from the beginning of the year, Korea Aerospace Industries, Hanwha Aerospace, and LIG Nex1 rose 72.9%, 48.8%, and 32.2%, respectively. Researcher Jo said, "With central banks worldwide tightening monetary policies, stock market required returns are rising, and profit growth is limited due to high inflation and high-cost structures, so the index's upper limit is likely capped," emphasizing, "Portfolio defense through inclusion of defense stocks is necessary." He added, "If stock selection is difficult, responding through the domestic defense exchange-traded fund (ETF), 'ARIRANG iSelect Aerospace & UAM ETF,' is also expected to be effective."

This content was produced with the assistance of AI translation services.