"Shock to financial markets due to Israel-Iran conflict...Focus on defense and shipping stocks"-Korea

"Soaring oil prices are negative for utilities, food & beverage, and airlines"

The conflict between Israel and Iran has shocked the stock market. Korea Investment & Securities views that as upward pressure on oil prices intensifies and inflation accelerates, the current trend toward interest rate cuts may be reversed. Defense and shipping are expected to benefit, while utilities, food & beverage, and airline sectors are likely to be negatively affected.

Kim Dae-jun, a researcher at Korea Investment & Securities, released a report on the 16th and said, "With the hardline standoff between Israel and Iran now in full swing, financial markets are also becoming uneasy. As Middle East risks spread, increased uncertainty in crude oil production and transportation has driven oil prices up," he stated.

He further explained, "Recently, speculative positions in crude oil have been increasing in the futures market. If the Middle East conflict continues, speculative funds could further fuel the rise in oil prices," and "Along with other commodities, there could be additional upward pressure on expected inflation." This effect may also cause the U.S. central bank (Federal Reserve)'s rate cut stance to be scaled back.

On the 13th (local time) at the New York Mercantile Exchange (NYMEX), the July contract for West Texas Intermediate (WTI) soared 7.3% to close at $72.98. This marks the largest daily increase since Russia's invasion of Ukraine in 2022.

The domestic stock market is also exposed to Middle East risk. Korea Investment & Securities predicts that defense stocks will attract market attention. Researcher Kim analyzed, "Unless Israel and Iran officially agree to suspend hostilities, the upward trend in defense stocks is unlikely to end." He added, "Unlike the past, when there was a shadow war under the surface, the current escalation toward a full-scale war makes defense the top area to watch."

By industry, Korea Investment & Securities says it is necessary to closely analyze the impact of high oil prices. Researcher Kim explained, "Utilities and food & beverage sectors tend to show weak returns when oil prices rise," due to higher cost concerns from raw material prices outweighing their defensive characteristics.

He went on to say, "Among transportation sectors, shipping may be a better choice than airlines, as shipping can benefit from higher freight rates. If Middle East uncertainty persists for some time, strategies to minimize losses should be considered."

Jin Young-gi, Hankyung.com reporter young71@hankyung.com