The retaliation from Iran following the United States' strike on Iranian nuclear facilities was a restrained response, contrary to the harsh rhetoric. Although it fired missiles at U.S. military bases in Qatar and Iraq, it is reported that Iran had given advance notice to the U.S. and others a few hours prior. This indicates that Iran was merely saving face with what can be termed a 'promised act.'
International oil prices reflect this assessment well. Brent crude fell below $70 in the European ICE futures market. Just a day earlier, prices had spiked to $80 per barrel, with fears rising that they could soar to $130 in the worst-case scenario, such as a blockade of the Strait of Hormuz.
Previously, global investment bank Bernstein advised to pay attention to whether the current conflict, which began with Israel’s strike on Iran, would turn into a prolonged war. For example, the Afghan and Iraq wars, which followed the 9/11 terrorist attacks, lasted a long time and saw the share prices of U.S. defense stocks rise faster than the growth rate of the Standard and Poor's 500 index.
Bernstein also identified important factors that could lead to geopolitical changes. After Russia’s invasion of Ukraine, defense stock prices soared in the short term but later stagnated; they began to rise again when neighboring countries increased their defense expenditures and the European Union (EU) announced a rearmament.
On the other hand, when the impact of a conflict is considered temporary and localized, defense stocks tend to spike in the short term and then give back all their gains. The invasions of Georgia by Russia in 2008 and the Israel-Hamas war in 2023 serve as representative examples.
What might be the current situation regarding the conflict surrounding Iran? Based on defense stock prices, it seems the market is evaluating it as a short-term affair. Shares of Lockheed Martin, Northrop Grumman, Rheinmetall, and BAE Systems surged sharply after Israel struck Iran on the 13th, but then showed a declining trend. Even Elbit Systems, an Israeli defense corporation, surged on the first trading day after the conflict began on the 15th, but then reversed.
Domestic defense corporations exhibited a slightly different trend. The stocks of Hanwha Aerospace, like global defense stocks, lost most of the gains made during the early stages of the conflict. However, Hyundai Rotem and LIG Nex1 continued to rise. This is interpreted as a result of a combination of export expectations from the European region and investment sentiment related to missile interception systems.
As important as whether this is a short-term war is the possibility that it could lead to geopolitical changes. Bernstein emphasized that Iran had been a major driving force behind military expenditures in Gulf nations. If Iran becomes less threatening and even a moderate regime comes to power, it will imply that the demand for weapons from Gulf nations will not be the same as it is now.
U.S. President Donald Trump stated on this day, 'Israel and Iran have agreed to a complete and comprehensive ceasefire.'
While variables still remain, it is a point in time to gauge the positions of defense stocks. If there are expectations for a surge in weapon demand from Gulf nations that have already been heavily factored in, adjustments should be considered.