[King Dollar's Bombardment] Massive Export Tailwinds... Defense Stocks' Advance Continues

Recent Large-Scale Export Contracts Including Poland
Dollar's Strong Surge Also Benefits Defense Industry

Editor's NoteThe dollar has surged beyond 'Strong Dollar' to the point where people are talking about a 'King Dollar.' The KRW-USD exchange rate recorded 1,205 won in the first quarter of this year, up 8.2% year-on-year, and rose 12.5% to 1,261 won in the second quarter. It soared to 1,384 won the day before, and there are forecasts that it could break through 1,400 won this year. Although the domestic stock market staggered under the 'King Dollar' shock, we looked at the stocks that shone amid this situation.

[Image source=Yonhap News]

[Asia Economy Reporter Myunghwan Lee] Defense stocks are bucking the downtrend caused by the so-called ‘King Dollar.’ This is due to recent large-scale export contracts and expectations that they will benefit from the high exchange rate.

According to the Korea Exchange on the 8th, the average stock price fluctuation rate of six defense-related stocks listed on the KOSPI market over the past month (August 8 to September 7) reached 12.95%. Hanwha Aerospace, which has Hanwha Defense as a subsidiary, saw its stock price rise 29.15%, while Hyundai Rotem and LIG Nex1 recorded increases of 17.85% and 17.25%, respectively. During the same period, the KOSPI fell 4.59%, and the KOSDAQ index retreated 7.63%.

The ultra-strong dollar, which exerted downward pressure on the domestic stock market, acted as a kind of benefit for the defense sector. Defense is considered a representative export industry. Daejun Kim, a researcher at Korea Investment & Securities, said, "With the dollar strengthening and the exchange rate rising, it is necessary to select sectors and stocks that can show defensive strength when the market is sluggish," adding, "Attention is needed for defense, secondary batteries, and shipbuilding, which can maintain a beta (individual stock price sensitivity) below 1 compared to the market and thus maintain defensive strength."

Along with the strong dollar, the sector-specific positive factor of ‘large-scale exports’ also supported the counter-trend rally in the down market. Hyundai Rotem announced on the 29th of last month that it had signed a contract to export K2 tanks worth 4.5 trillion won to Poland. Hanwha Defense also disclosed on the same day that it had signed an export contract for K9 self-propelled howitzers worth 3.2 trillion won with the Polish government.

The securities industry expects that these export contracts could raise next year’s earnings estimates for defense companies. Bongjin Lee, a researcher at Hanwha Investment & Securities, said, "The defense sector is showing an overall favorable business trend centered on overseas orders," adding, "Domestic defense industry momentum from overseas orders is expected to improve this year, and from next year onward, earnings improvement through overseas orders will be in full swing, so we maintain a positive outlook."

There is also analysis that domestic defense companies will benefit as defense demand changes due to the Russia-Ukraine war. Dongheon Lee, a researcher at Shinhan Financial Investment, said, "Through the Ukraine war, countries’ weapon requirements are changing into forms such as practical use, cost-effectiveness, and rapid deployment, so exports of domestic companies with strengths compared to competing countries will continue to increase," adding, "Although the stock price has risen significantly, considering mid- to long-term demand, investment attractiveness remains high."