[MarketING] Defense Stocks Excited Over Ukraine Arms Support Hint, Unsure Whether to Smile

KOSPI Closes Lower After One Day
KOSDAQ Plummets 2.58%

The KOSPI turned to a downward trend after a day. Similarly, the KOSDAQ, which also fell after a day, plunged more than 2% as foreign and institutional investors sold off heavily. While the overall stock market showed weakness, defense stocks surged amid rising global geopolitical tensions.

KOSPI closes lower... KOSDAQ falls to the 880 level

On the 20th, the KOSPI closed at 2,563.11, down 11.97 points (0.46%) from the previous day. The KOSDAQ ended the session at 885.71, down 23.49 points (2.58%).

[Image source=Yonhap News]

Foreign and institutional investors led the sharp decline in the KOSDAQ by offloading large volumes. On that day, foreign investors sold 300 billion KRW and institutions sold 242.3 billion KRW in the KOSDAQ market. Meanwhile, foreign investors net bought 154.2 billion KRW in the KOSPI market, which limited the KOSPI's decline relatively.

Kim Seok-hwan, a researcher at Mirae Asset Securities, analyzed, "The KOSDAQ index faced downward pressure as foreign selling expanded along with the release of stocks in the secondary battery sector, which had surged recently, due to disappointment over Tesla's earnings."

According to Tesla's Q1 earnings report released the previous day, net income fell 24% year-on-year to $2.513 billion (approximately 3.3398 trillion KRW). Adjusted earnings per share (EPS) were $0.85, in line with market expectations. Revenue increased 24% year-on-year to $23.329 billion. Although revenue rose due to price cuts, net income significantly decreased. Reflecting Tesla's poor performance, secondary battery stocks showed weak price trends. L&F plunged 8.01%, Cheonbo fell 4.24%, and EcoPro dropped 1.14% respectively.

While the overall stock market showed weakness, defense stocks stood out with sharp gains. Hyundai Rotem rose 11.62%, reclaiming the 30,000 KRW level. This was the first time this year that Hyundai Rotem's closing price surpassed 30,000 KRW. During the session, it rose to 33,150 KRW, hitting a 52-week high. Hyundai Rotem has continued an eight-day consecutive rise as of that day, reflecting expectations for orders and earnings amid the recent spread of global military tensions. Continuous inflows of foreign and institutional buying supported the stock price increase. Foreign investors have net bought Hyundai Rotem for nine consecutive trading days, and institutions for seven consecutive trading days as of that day.

KB Securities raised Hyundai Rotem's target price from 35,000 KRW to 37,500 KRW. Jeong Dong-ik, a researcher at KB Securities, explained, "This upward revision reflects adjustments to earnings estimates based on the delivery schedule and estimated unit price of the K2 tank, as well as changes in interest rates. On the 31st of last month, a consortium implementation agreement was signed with Poland's state-owned defense group PGZ for the production and delivery of the K2PL. Accordingly, it is expected that the second contract, consisting of 820 units?320 units produced and delivered domestically by Hyundai Rotem in the first half of this year and 500 units produced locally by PGZ in Poland?will be finalized." He added, "Romania is also reportedly interested in acquiring K2 tanks, so attention to follow-up orders is necessary."

Defense stocks gain momentum amid rising global tensions

Recently, defense stocks have been on the rise as global geopolitical tensions escalate. With the ongoing war in Ukraine increasing demand for weapons, geopolitical tensions such as the US-China conflict over Taiwan have flared up in various places, and military build-ups amid the new Cold War atmosphere are also emerging.

On this day, besides Hyundai Rotem, Firstec surged 24.66%, and VICTEK rose 8.29%. The market views the strong performance of defense stocks as a reaction to President Yoon Seok-yeol's mention of possible weapons support to Ukraine, which provoked a strong backlash from Russia.

Additionally, Taiwan is reportedly planning to purchase a large number of missiles from the United States in preparation for China's invasion threat, while China is intensifying tensions by conducting high-intensity live-fire drills in the West Sea.

Byun Jong-man, a researcher at NH Investment & Securities, analyzed Lockheed Martin, a leading US defense company, saying, "In the international situation where the new Cold War currents are intensifying centered on the US, China, and Russia, each country's will for autonomous defense and political tensions create a favorable environment for the defense industry, which is a long-term growth factor."