Armed clashes between the United States and Iran have dragged on for more than four months, but domestic defense stocks are instead losing steam. The conventional wisdom that defense stocks surge when geopolitical tensions rise is not holding this time. As concerns grow that new contracts in the Middle East, a key export market, could be delayed due to the prolonged conflict, the market's focus has shifted from a "war windfall" to a "contract gap."
According to the Korea Exchange (KRX) on the 21st, the average share price increase since the start of the year for leading domestic defense names Hanwha Aerospace, Hyundai Rotem, Korea Aerospace Industries (KAI), Hanwha Systems, and LIG Defense&Aerospace was just 14.9% as of the previous day. Compared with the KOSPI's 55.26% rise over the same period, the gain did not even reach half.
Compared with this year's highs, all have undergone steep corrections: Hanwha Aerospace (-49%), Hyundai Rotem (-48%), Korea Aerospace Industries (KAI) (-33%), Hanwha Systems (-67%), and LIG Defense&Aerospace (-38%).
The mood was different in the early days of the war. As the U.S.-Iran clash intensified, expectations for higher defense budgets and increased weapons demand across countries drove defense stocks sharply higher. But as time passed, hopes for a war windfall faded, and worries grew louder that new contracts in the Middle East could be delayed.
Defense deals must pass through multiple steps before a contract is secured, including political and diplomatic conditions, budget allocations, and the purchasing country's decision-making. If the war drags on, Middle Eastern countries could face heavier fiscal burdens and project timelines may be pushed back, reducing earnings visibility, analysts say. The recent setback in the competition for Canada's next-generation submarine program (CPSP) is also cited as a factor dampening investor sentiment.
Kang Tae-ho, an analyst at DS Investment & Securities, said, "The weakness in the five defense companies reflects a combination of a continued gap in large orders, the failure to win the Canadian submarine program, and concerns about contract delays due to the prolonged Middle East war," adding, "What the market fears most is delays in new orders, and securing orders consistently is necessary to maintain long-term performance."
President Lee Jae-myung's first attendance at a North Atlantic Treaty Organization (NATO) summit did not lead to a rebound in share prices. Lee proposed "Korea-NATO defense industry partnership 2.0" and discussed cooperation on warship construction with U.S. President Donald Trump, but there were no announcements of concrete contracts or new projects involving domestic defense corporations.
Still, unlike in the first half, securities houses are leaning toward the possibility that order momentum will revive in the second half, with a series of large overseas projects scheduled.
Hanwha Aerospace(012450) is awaiting results this month on selection of participants for the prototype competition in the U.S. Army's wheeled self-propelled howitzer modernization (MTC) project, estimated at about 10 trillion won. The main contract for the joint development of Spain's K9 self-propelled howitzer is also expected to be signed in July–August. Hyundai Rotem(064350) is likewise expected to sign a framework agreement for Peru's K2 tank and wheeled armored vehicle project (about 3 trillion won).
Middle East projects are still viewed as a viable pipeline. The Saudi Arabia Ministry of National Guard (MNG) project and Iraq's K2 tank project are likely to see talks pick up speed if the war cools. As Middle Eastern countries have recently come to appreciate the importance of air defense networks, interest is expected to continue in Korea's air defense systems and interceptor missiles.
Kang said, "Unlike in the first half, major orders are expected to cluster in the second half," adding, "Given that defense stocks now are more likely to move on order flow than on earnings, investor sentiment could recover quickly if large contracts materialize."