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As hopes for a cease-fire in the Middle East rise, South Korean defense stocks have entered a sharp correction. Shares that surged on Middle East geopolitical risk are now retreating as the market shifts into ceasefire and negotiation mode and investors take profits. Still, analysts say the mid- to long-term outlook remains intact given global rearmament trends, the export competitiveness of South Korean defense firms, and a growing market for military AI and robotics.
On May 15, the Korea Exchange reported that the ‘KRX K-AI Defense TOP5+’ index fell 9.29% over the past week (May 6–14). That underperformed the KOSPI (15.06%) and KOSDAQ (-1.87%) returns and ranked second-worst among the exchange’s 38 thematic indices, behind ‘KRX K-AI Secondary Battery’ (-9.66%). The ‘KRX 300 Industrials’ index, which includes many defense names, rose just 0.25%.
Over the same period, Hyundai Rotem led the sell-off with a 21% drop. I3 Systems fell 16.92%, Hanwha Aerospace dropped 10.85%, and LIG Defense & Aerospace slid 10.68%. Other defense names also weakened, including Poongsan (-7.48%), Hanwha Systems (-3.01%), and Korea Aerospace Industries (-4.33%).
Defense-focused ETFs also showed sharp declines. Hanwha Asset Management’s PLUS K Defense fell 10.86%; Mirae Asset’s TIGER K Defense & Space dropped 10.68%; Samsung Asset Management’s KODEX Defense TOP10 lost 10.46%; and Shinhan Asset Management’s SOL K Defense fell 8.06%. Leveraged funds KODEX Defense TOP10 Leverage and PLUS K Defense Leverage plunged 20.61% and 20.86%, respectively, ranking 6th and 7th from the bottom among 1,099 listed funds.
Domestic defense stocks had surged rapidly after the Middle East conflict broke out at the end of February on hopes of overseas orders, but investor sentiment cooled as the situation moved toward a ceasefire and negotiations. Reuters and other international outlets reported Vice President Vance saying at a White House briefing, “We think we are making progress.”
Kim Jung-won, a researcher at Hyundai Motor Securities, said sectors like semiconductors drive index gains through ROE improvements and upgraded earnings forecasts, making them earnings-driven leaders. By contrast, defense and shipbuilding are expectation-driven: they move on policy shifts, order prospects, and industry sentiment. He added that both defense and autos have shown weaker momentum after earlier expectations were priced in.
Despite near-term pressure, market participants expect South Korean defense companies to continue expanding exports even if negotiations lead to a cease-fire. Global defense budgets are rising—from the Russia-Ukraine war to heightened U.S.-Iran tensions—and Korean firms remain competitive thanks to fast delivery, cost-efficiency, and improving performance.
LS Securities projects global defense spending will grow roughly 9% year-over-year this year and expects U.S. defense spending to rise about 17%. The firm noted that the Trump administration requested a 44% increase in defense funding for fiscal 2027. Lee Jae-kwang, an LS Securities researcher, says the U.S.-led, rules-based order is being reshaped, and that tangible military capability and economic pressure are taking precedence over norms—factors likely to keep defense budgets climbing worldwide.
Momentum in military robotics is also building, from deployment of the U.S.-made Phantom MK-1 humanoid on the Ukrainian battlefield to the South Korean Defense Ministry’s request for Hyundai Group to supply the Atlas humanoid. Analysts estimate the global military robotics market at $19.7 billion in 2024 and project it will grow at a 8.7% compound annual rate to reach $32.5 billion by 2030.
Jung Dong-ik, a researcher at KB Securities, said the military robotics market should expand rapidly due to manpower constraints, military modernization, demand for cost efficiency, and the need for scalable autonomous solutions. He added that integrating artificial intelligence and machine learning into robot platforms is driving transformative improvements in autonomous decision-making and operational efficiency—enabling real-time pattern recognition, adaptive responses to diverse combat scenarios, and autonomous execution of essential tasks with minimal human intervention.
Still, analysts caution that defense procurement contracts are difficult to predict in timing and size, so investors should remain selective. Lee Jae-kwang noted that while many firms expect large export orders, the industry’s nature and political and diplomatic variables make outcomes uncertain. He advised investors to target names that appear relatively undervalued against their order backlogs.
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