How do defence stocks respond to geopolitical crises?
Catalin Gheorghe and Oana Panazan set out to analyse 75 global defence companies from 2014 through 2023 in Investigating the effect of geopolitical risk on defence companies' stock returns.
This period includes Russia's annexation of Crimea, the COVID-19 pandemic, the Russia–Ukraine war, and more, to detect how geopolitical risk (GPR) shocks influence stock performance. Their takeaways include:
- Crimea (2014): the Russian annexation of Crimea was a turning point: over 50% of defence companies saw immediate stock impacts, with firms headquartered in Europe, the US, and South Korea showing particularly notable reactions that year.
- Post-2014 uptrend: geopolitical conflicts and tensions have matched a general growth trajectory for the defence sector's market value over the past decade.
- COVID-19 (2020): about 30% of defence companies experienced medium-term stock movements linked to GPR, generally with a negative influence that was neither universal nor extreme.
- Ukraine War (2022): Russia's invasion of Ukraine had a significant impact, affecting 81% of the sampled defence companies. Defence stock returns worldwide spiked significantly as many investors pivoted toward military-related assets.
- October 7th outbreak (2023): the Israel-Hamas conflict triggered a local surge in Israeli defence stocks but did not raise worldwide geopolitical risk. Unlike the Ukraine war, this event's market impact was contained regionally at the time of publication.
The article suggests geopolitical risk is now a major driver of defence sector returns, and GPR-induced market swings are now a reality.
Investors and risk managers need to understand defence industry dynamics for effective hedging and diversification against GPR shocks and tensions spike.
This research focuses on large publicly traded defence firms and a handful of geopolitical shocks: localised wars that don't spike the overall geopolitical risk index may not be possible to analyse through the same lens.