As if we needed another geopolitical flashpoint to contend with, the long-simmering feud between China and Taiwan has once again escalated. According to a Reuters report, on Oct. 1, Chinese warplanes entered Taiwan’s air defense identification zone (ADIZ), followed with another incursion a day later. In total, 77 Chinese jets infiltrated the ADIZ over a 48-hour period, potentially ramping up demand for defense stocks.
A conflict with a decades-long history, China has sent multiple aircraft toward Taiwan on a near-daily basis in recent years, per a report from Fox News. But in recent days, the matter has escalated, in part due to the Chinese government’s need to restore credibility in its prior threats about reunification. Of course, such a unilateral action has grave consequences for world stability, cynically bolstering defense stocks to buy.
Should China regain control of Taiwan, it can assert tremendous dominance over the South China Sea. And that will create a ripple effect regarding global economic affairs. Indeed, Japan — which has always carried an ambiguous policy toward the island nation — made headlines when Deputy Prime Minister Taro Aso pledged military support, characterizing a possible Chinese attack as an existential threat. Thus, the narrative for international defense stocks is awfully potent.
To be fair, the Chinese government, though deeply irritated at Taiwan’s insistence on independence, is not exactly clamoring for a hot conflict. While it could take over the breakaway territory relatively easily, it will come at both a human and economic cost. That’s why some geopolitical experts suggest that the Pratas Island, a small island under Taiwanese administration, could instead become a possible conflict zone. If so, that’s another avenue of relevance for defense stocks.
Also, keep in mind that unfavorable opinions about China have reached historic highs due to the handling of Covid-19. And we’re not just talking about the U.S. but countries all over the world. While Covid-19 and political tensions in Asia don’t necessarily correlate, at this point it seems any press is bad press, so if tensions with Taiwan reach critical mass, it will likely take bad impressions about China to a new level. Again, while cynical, it’s an excellent backdrop for these defense stocks to buy.
- Lockheed Martin (NYSE:LMT)
- Raytheon Technologies (NYSE:RTX)
- Boeing (NYSE:BA)
- Huntington Ingalls Industries (NYSE:HII)
- Northrop Grumman (NYSE:NOC)
- Kawasaki Heavy Industries (OTCMKTS:KWHIY)
- Austal (OTCMKTS:AUTLF)
Finally, it’s worth reiterating that the tragic U.S. pullout from Afghanistan plunged President Joe Biden’s approval rating. I’m sure he’s aware that if he lets China take over Taiwan, it’ll be lights out for his administration — and probably for Democrats downwind. This dynamic necessitates a show of force, which is rich soil for defense stocks to grow on.
Defense Stocks to Buy: Lockheed Martin (LMT)
Near the end of 2020, the U.S. government announced $5.1 billion in arms sales to Taiwan per a Reuters report. Predictably, the move angered China. Bluntly speaking, the Chinese military would have to contend with the business end of any weaponry the U.S. sends to Taiwan so I get the outrage.
One of the defense stocks that benefitted from the arms sales was Lockheed Martin. Known everywhere for manufacturing the most advanced fighter jets, Lockheed also provides an array of weapons systems. In the series of Taiwan deals, the company provided truck-based rocket launchers called High Mobility Artillery Rocket System (HIMARS).
Any contracts based on this latest violation of Taiwan’s ADIZ is of course pure speculation. At the same time, it wouldn’t surprise me if LMT were again to become a beneficiary. As one of this country’s iconic defense stocks, Lockheed gets the job done while sending a very powerful message to America’s adversaries.
Also, I can’t help but notice that since December of 2018, LMT stock has been charting a series of higher lows. Perhaps this newly intensified conflict might send shares flying once again.
Raytheon Technologies (RTX)
While sending advanced warplanes to American allies has been an instrumental component of advancing our foreign policy interests, it’s a tricky matter when it comes to the China-Taiwan conflict. In 2015, The Diplomat argued against sending F-16 fighter jets to Taiwan and instead suggested a counteroffer: deliver weapons systems that will severely stymie a land invasion.
Called anti-access/area denial (A2/AD) in military parlance, the defensive strategy is an effective methodology for a smaller force to discourage a much larger one. To better illustrate, think about the movie 300. While the Spartans were only a handful relative to the advancing Persian Empire, the former knew the lay of the land and leveraged it to maximum advantage.
While this is again speculation, defense stocks that enable an underlying anti-access strategy could perform wonders in the market as tensions heat up. For this purpose, there’s probably no better candidate than Raytheon Technologies.
Offering a variety of missile weapons, Raytheon created the renowned Stinger missile system, which is used by Taiwan.
Defense Stocks to Buy: Boeing (BA)
A controversial name among defense stocks, Boeing has seemingly trudged from one public relations nightmare to another. And that was before the novel coronavirus pandemic. Once Covid-19 became a reality, BA stock suffered a cataclysmic drop as air travel plummeted. While shares have recovered from their March 2020 doldrums, they’re still well below their pre-pandemic highs.
In other words, you want to be careful how you approach Boeing. Nevertheless, the aerospace giant and defense contractor offers a compelling take for the escalating tensions in Taiwan.
For one thing, the company’s defense, space and security segment is now its biggest revenue driver, accounting for 45% of the top line. In terms of operating earnings, the allocation is even more extreme, with defense-related businesses accounting for 75%.
Second, Boeing is particularly relevant to the potential defense of Taiwan thanks to its Harpoon missile. With the ability to knock out targets in excess of 67 nautical miles away, the Harpoon is a deterrent to any foe.
Huntington Ingalls Industries (HII)
If you look at the capabilities and reach of the U.S. Navy against other naval fleets, it’s not even close — America’s dominance on the open waters knows no bounds. But that doesn’t necessarily mean that the Navy will continue to maintain this lofty status. In order to keep the fleet battle-ready, the Pentagon must prioritize shipbuilding, which naturally benefits Huntington Ingalls Industries.
Bolstering this branch of the military has become a rising concern among defense officials. But with the rise of China — and of course the escalation of tensions in Taiwan — the matter has become a red-hot issue. It’s possible that Huntington Ingalls could develop warships for Taiwan but that’s a speculative prospect. Much more realistic is the natural demand spike from our own forces to maintain freedom of access in the high seas.
As you know, while the simmering dispute of Taiwan’s independence centers on deep-seated historical roots, for the U.S., one of the biggest considerations is the South China Sea. With China increasingly imposing its unilateral policies on an economically vital sea lane, the U.S. and its allies have no choice but to respond. Therefore, HII is fundamentally one of the best defense stocks to buy under this context.
Defense Stocks to Buy: Northrop Grumman (NOC)
Back in the tail end of former President Donald Trump’s administration, the White House agreed to sell four MQ-9 Reaper drones to Taiwan amid escalating threats from China at the time. Plus, reading between the lines, the coronavirus bit probably helped smooth the process along. Previous administrations restricted the sale of such sophisticated and closely guarded secrets to other nations.
From a U.S. Department of State press release, the sale will aid Taiwan’s “continuing efforts to modernize its armed forces and to maintain a credible defensive capability.” The only problem for investors of defense stocks? The manufacturer of the Reapers is General Atomics, a privately held corporation. But don’t worry — it’s very possible that Northrop Grumman can benefit from the present tensions in Taiwan.
Again, the potential sale of Northrop drones to Taiwanese forces is all speculation. But the company offers similar drone technologies through its MQ-4C Triton unmanned aircraft system. Thanks to its intelligence-gathering and communication-relay capabilities, the Triton could play a significant role in executing A2/AD tactics.
Plus, NOC could rise even without a sale to Taiwan. After all, should things go hot over there, the U.S. might get involved due to the region’s economic significance.
Kawasaki Heavy Industries (KWHIY)
Anytime you’re thinking about defense stocks, you should probably allocate 95% of your funds to domestic companies. The label “Made in the U.S.A.” is not always a comforting thought, especially if you’re in the market for a passenger car. However, when the narrative shifts to military equipment, America is unparalleled.
Shifting gears, Japan’s Kawasaki is perhaps best known to American audiences for manufacturing motorcycles. However, most will probably be surprised to hear that Kawasaki also develops multiple systems for the security industry, making KWHIY one of the underappreciated defense stocks to buy.
In particular, Kawasaki’s role in developing world-class submarines will be a relevant revenue-generator should tensions in Taiwan escalate further. Beyond the surprise overture that Japan may defend Taiwan if push comes to shove, the other island nation also has strong economic incentives to prevent China from grabbing more power and influence.
Plus, submarines are indispensable for A2/AD strategies, with Japan carrying a capable submarine fleet.
Defense Stocks to Buy: Austal (AUTLF)
Another actor we haven’t considered in the Indian Ocean yet is Australia. In recent years, Chinese officials have routinely offended Australia with threats and insults. That said, the Australian economy has grown increasingly dependent on its exports to China, making for a delicate situation.you may want to expand your coverage of defense stocks to buy with Austal, Australia’s premiere shipbuilding firm for the civilian and defense industries.
But like schoolyard politics dictate, when bullies overstep their bounds too often, they sometimes get punched in the teeth. With that prospect in the backdrop, you may want to consider shares of Austal. It’s super-risky, which is why it’s last on this list but it could be worthwhile with some modest speculation funds.
Austal is Australia’s premiere shipbuilding firm for the civilian and defense industries, providing another avenue of investing opportunities for the cynically minded.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.