Defense Stocks Surge on Geopolitical Risks; Hanwha Group Rises to 5th in Market Cap

Domestic defense stocks surged in unison as Middle East tensions escalated sharply following U.S. and Israeli airstrikes on Iran. The defense sector, which had briefly paused after underperforming the KOSPI's gains last month, regained momentum. Hanwha Group, with its significant stakes in subsidiaries including Hanwha Systems and Hanwha Aerospace, overtook HD Hyundai to rank fifth in total market capitalization.

According to the Korea Exchange on the 3rd, shares of LIG Nex1 and Hanwha Aerospace soared 29.86% and 19.83% respectively from the previous trading day, both reaching 52-week highs. While the KOSPI index plunged 7.24% amid fallout from the U.S.-Iran conflict, defense stocks on the main bourse showed collective strength: Hanwha Systems (29.14%), Poongsan (12.78%), Hyundai Rotem (8.03%), and Korea Aerospace Industries (3.19%). In the ETF market, defense-related products including TIGER K Defense & Space (16.60%), PLUS K Defense (13.54%), and KODEX Defense TOP10 (13.31%) swept the top daily returns.

Buoyed by gains in Hanwha Systems and Hanwha Aerospace, Hanwha Group's market cap ranking surpassed HD Hyundai to reach fifth overall. Hanwha Group's market cap stood at 177.9 trillion won, down 0.73% from the previous day. While the remaining 19 stocks in the group all closed lower, the two heavily weighted defense stocks offset much of the decline, lifting the group's ranking. Top conglomerates saw relatively steeper drops—Samsung (-5.36%), SK (-4.49%), Hyundai Motor (-7.38%), and LG (-7.70%). HD Hyundai Group, previously ranked fifth, also fell 2.44%, widening its gap with Hanwha Group by more than 7 trillion won in a single day.

The defense sector's strength is attributed to depleting air defense interceptor missile inventories emerging as a practical constraint amid continued U.S.-Israeli attacks on Iran and Iranian retaliation. Expectations that defense companies' medium- to long-term order environments could improve have stimulated investor sentiment. On Wall Street overnight, major defense stocks including Northrop Grumman (6.02%), RTX (4.71%), and Lockheed Martin (3.37%) all closed higher.

Global investment bank Morgan Stanley assessed that heightened geopolitical risks could reinforce a structural upcycle in defense spending and raise expectations for improved global defense industry conditions. Morgan Stanley analyzed that Korean defense stocks have shown a clear tendency to generate excess returns versus the KOSPI during geopolitical crises. The bank also forecast that the defense sector would serve as a defensive growth play that lowers portfolio "beta" in this volatile market, recommending portfolio risk diversification through energy and defense themes.

Domestic brokerages also raised expectations for the defense sector. Byun Yong-jin, analyst at iM Securities, said: "While significant uncertainty remains depending on how this war unfolds, it will once again powerfully remind the world of the importance of self-reliant defense through strengthening one's own defense capabilities—for the first time in four years since the Russia-Ukraine war. Ground warfare escalation in the Middle East cannot be ruled out, so demand for land-based weapons will also increase."

Hana Securities raised its target price for LIG Nex1 to 710,000 won, up 26.3% from its previous estimate. Chae Un-saem, analyst at Hana Securities, noted: "Interceptor missile consumption by not only the U.S. but also major Middle Eastern countries could accumulate rapidly, while production capacity expansion remains limited on the supply side. The price-competitive Cheongung-II, combined with recent strengthening of defense cooperation between the Korean government and the UAE, provides momentum that increases visibility for additional exports."