Profiting Off the War: How defence stocks are rocketing amid Israel-Hamas conflict

The Israel-Hamas war, now entering Day 13, has extracted a huge toll; over 2,500 people are dead, thousands of others are injured and millions have been displaced from their homes. With the Gaza hospital bombing on Wednesday, there are concerns that the conflict will escalate and plunge the area of West Asia into instability and violence.However, amid the grief, the anguish and the fury, there seems to be a sector that is smiling. Their smiles are because the war is benefiting them.Who are we talking about?The defence sector – the military contractors whose stocks have seen a steady rise since Israel declared war against Hamas after the deadly and brazen attack on 7 October.We take a closer look at how numerous defence manufacturing firms have seen a bump in their stock value and how the business of war benefits them each time a region is plunged into conflict.Defence stocks on a highShares of contractors such as Lockheed Martin, General Dynamics and Britain’s BAE Systems have seen a jump of around 10 per cent since the start of the Israel-Hamas war. Northrop Grumman’s shares are trading 16 per cent higher.Arlington-based RTX, which has been hit by defects, also saw gains of five per cent. The stocks for Germany’s Rheinmetall, the maker of the guns for Leopard 2 tanks, have jumped also jumped 17 per cent.Incidentally, Lockheed Martin manufactures the F-35 fighter jets, which are used by the Israeli military. Similarly, Northrop Grumman manufactures combat vehicles, which are used by Israel.On 16 October, a Reuters report stated that Invesco Aerospace & Defense ETF attracted $48 million in net weekly inflows, its best showing since July 2022. In Europe, the recently launched Future of Defence ETF saw weekly inflows of $1.1 million.The Anadolu Agency further reported that French-based Dassault and Thales’ shares were up 4.15 per cent and 4.26 per cent, while Türkiye’s, Aselsan arms company’s shares added 7.23 last Monday.Speaking on the gains, Bernstein analysts led by Douglas Harned stated, “War stocks typically notch immediate gains after geopolitical shocks, but history shows those increases generally stall and are not sustainable.”Other commentators have agreed with this analysis, but cautioned that any escalation in the war, such as if other West Asia states join in, could trigger more extreme market responses. This is a potential scenario, especially as Iran is reported to have helped plan the Hamas operation.[caption id="attachment_13270892" align="alignnone" width="640"] Israeli soldier drive a tank to a staging area near the border with Lebanon. An Israeli ground offensive in Gaza would further escalate the war raging since Hamas launched its unprecedented attack days ago. AP[/caption]Defence on a war highThis isn’t the first time that defence companies are seeing huge spikes in their share value. In 2022, as Russia and Ukraine went to war against one another, the defence industry supplying the weapons to both sides, saw gains and made substantial profits.In the early days of the war, Lockheed Martin’s stock price rose by 2.79 per cent to $396.19. Similarly, aerospace specialist rival Northrop Grumman experienced a steep 4.53 per cent gain to $399.32, while shipbuilding giant Huntington Ingalls saw its stock price increase by 2.34 per cent to $183.87, and surveillance specialists L3Harris rose by 3.60 per cent to $222.97.Prior to this, the same was seen during the start of the Gulf War in 1990, and the wars in Afghanistan and Iraq.

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Time of war and increased defence spendingMany analysts believe that in today’s time of war and aggressive muscular posturing, defence companies experience the greatest windfalls.What does this mean? A threat of war or conflict has seen nations up their defence budgets, which, in turn, is beneficial to defence companies.According to a study by Stockholm International Peace Research Institute (SIPRI), world military spending reached an all-time high of $2.24 trillion last year – eighth year in a row. The SIPRI study noted that Europe saw the steepest rise in at least 30 years in military spending – 13 per cent up. SIPRI said most of that was linked to Russia and Ukraine, but other countries also stepped up military spending in response to perceived Russian threats.[caption id="attachment_13270952" align="alignnone" width="640"] Israeli soldiers get ready to patrol along a road near the border between Israel and Lebanon. AP[/caption]The study also revealed that Russia’s military spending grew by an estimated 9.2 per cent to about $86.4 billion, equivalent to 4.1 per cent of the country’s GDP in 2022, up from 3.7 per cent in 2021.And this rise in military spending isn’t exclusive to European nations. Even Asian nations such as India, Japan and South Korea saw a boost in defence budgets on account of a more aggressive and muscular China.For instance, India was the fourth largest defence spender, 6 per cent more than in 2021 and 47 per cent more than in 2013, a reflection of continuing border tensions with both China and Pakistan.Additionally, Japan, who has been known to be a pacifist country, announced a boost to its defence budget for 2023 to a record 6.8 trillion yen ($55 billion) in the face of regional security concerns and threats posed by China and North Korea. The announcement had made big headlines the world over, as it was an historic change from Japan’s exclusively self-defence policy since the end of World War II.Similarly, South Korea also proposed a $42.1 billion defence budget for 2023. It said the new expenditure is a 4.6 per cents increase over the allocation in 2022. The ruling government attributed the increase to South Korea's “severe security situation” – a reference to North Korea’s escalating efforts to test and launch strategic missiles.As Dr Nan Tian, a senior researcher with SIPRI’s military expenditure and arms production programme, said: “The continuous rise in global military expenditure in recent years is a sign that we are living in an increasingly insecure world.”And this insecure world isn’t changing anytime soon, meaning defence budgets will keep rising, and arms manufacturers will continue to gain from death and destruction.With inputs from agencies