South and North Korea: Handshake, Peace Talks Hurt U.S. Defense Stocks | Fortune

South and North Korea: Handshake, Peace Talks Hurt U.S. Defense Stocks | Fortune




Here’s Who Isn’t Winning From Denuclearization Talks and Friendlier North Korea-South Korea Relations





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By LUCINDA SHEN
April 27, 2018


While stock markets in Asia are breathing a sigh of relief after North and South Korea’s leaders shared a friendly handshake and vowed to work toward wiping away nuclear weapons from the Korean Peninsula Friday, once high-flying defense stocks are taking the hit.

On Friday, while the broader stock market as measured by the S&P 500 index remained largely flat, the S&P Aerospace and Defense Select Industry Index fell roughly 1.3%.

The U.S.’s five largest defense contractors shed about $10.2 billion in value on Friday alone. Lockheed Martin fell 2.5% to a valuation of about $92.1 billion; Northrop Grumman slid 3.4% to $56 billion; General Dynamics shed 3.8% to $60.7 billion; Raytheon dropped 3.6% to $50.8 billion; and finally, Boeing slid a much lesser 1% to $200.2 billion.


The drop off comes even though quarterly earnings posted in recent days by General Dynamics, Lockheed Martin, and Northrup Grumman beat analyst expectations.

The losses comes after North and South Korean leaders met Friday, agreeing to work toward removing nuclear weapons from the peninsula, and negotiate with the U.S. to officially declare peace and put an official end to the Korean War.

It was a turn in rhetoric. Since the election of President Donald Trump in 2016, the aggressive talk between the U.S. and North Korea had been heating up—pushing investors wary of a potential war into defense stocks. So over the past year, while the S&P 500 has risen roughly 12%, the S&P Aerospace & Defense Select Industry Index has gained 27%.

Though the peace talks were not entirely unexpected. The sell off began in earnest on Tuesday, when French President Emmanuel Macron visited the U.S., discussing topics including the Iran nuclear deal and North Korea. In the same day, Trump also made comments that made peace talks sound more likely. After having called North Korea’s Kim names such as “little rocket man” in the past, Trump dubbed the Asian leader “honorable” and “open.”

The S&P Aerospace & Defense Index is down about 4.3% since then.

Notably, the index is still beating the market over the past year—with tensions continuing with other nations.

“With the threat environment unlikely to abate per a host of global tensions spanning China, the Mideast, North Korea, and Russia, we do not foresee any imminent fall-off in US military budgets,” wrote Morgan Stanley analysts led by Rajeev Lalwani.

And, notably, the agreement between North and South Korea Friday was light on details—allow skeptics room to doubt how, and if denuclearization will be rolled out to the extent the enthusiasm shown by North and South Korean leaders Friday seemed to suggest.