Defense stocks rally in response to China Xi's speech

South Korean manufacturers of jet fighters, aircraft engines and weapon systems saw their share prices soaring in heavy trade on Monday, powered by foreign investors' purchases amid rising tensions between China and its neighboring countries.

Last Friday, Chinese leader Xi Jinping told the nation that the Chinese people would never allow any foreign force to bully, oppress, or enslave the country. “Anyone who tries to do so shall be battered and bloodied from colliding with a great wall of steel forged by more than 1.4 billion Chinese people using flesh and blood,” the Wall Street Journal quoted him as saying in the speech to mark the 100th anniversary of the ruling Communist Party.

In an immediate response to his stern warning, defense stocks traded on the Kospi rose slightly on Friday. They gained another momentum on Monday thanks to foreign investors' aggressive buying.

Hanwha Aerospace Co., South Korea's only aircraft engine maker, surged 10.42% to close at 53,500 won ($47). Its intraday high of 54,500 won marked the strongest level in nearly five years.

Foreign investors purchased a net 576.2 billion won ($509 million) worth of the stock. Institutional investors bought a net 211.9 billion won of Hanwha Aerospace.

Hanwha Systems Co., a manufacturer of radars and surveillance systems for military use, gained 5.26% and hit its one-month closing high of 18,000 won.

LIG Nex1 Co., which supplies munitions and weapon systems, leapt 5.34% to end at 44,350 won. Institutional investors scooped up a net 524.9 billion won of the stock, followed by foreigners' net purchase of 147.9 billion won. 

Korea Aerospace Industries Ltd., a jet fighter maker, advanced 2.58% to 33,850 won. Foreign investors snapped up a net 266.7 billion won worth of the stock, with institutions buying a net 71.6 billion won.

In comparison, the broader market index Kospi added 0.35% to close at 3,293.21.

Xi's Friday speech was seen as taking aim at the US administration. But market analysts said South Korea could be one of "any foreign forces" Xi mentioned, because his speech followed the US-South Korea's summit held in Washington last month.

"Whenever the Korean peninsula's geopolitical risk came to the spotlight, foreign investors put defense stocks in their portfolios," said NH Investment & Securities analyst Choi Jin-myung. "This time, their shift to defense stocks, which show low sensitivity to economic cycles, also reflect some concerns that the Kospi market has been overheated." 

Write to Tae-hoon Lee at beje@hankyung.com
Yeonhee Kim edited this article.