[SINGAPORE] Recent attacks between Israel and Iran have caused investors to mull over where to place their bets next, especially with defence names rallying, as well as gold and oil prices spiking.
Overall, global defence contractors on average rallied as much as 4 per cent in the initial reaction after the Israel-Iran attacks, Morningstar noted.
General Electric Aerospace closed at US$235.75 on Tuesday (Jun 17) on the New York Stock Exchange, recording a more than 40 per cent year-to-date increase. US multinational aerospace and defence conglomerate RTX also closed 28.3 per cent higher in the year to date at US$148.48 on Tuesday.
Oil prices initially spiked by 7 per cent on Jun 13 when Israel and Iran first traded strikes, before easing in early trade on Wednesday during Asia hours, on the sixth day of conflict. Brent was up 0.3 per cent, and US West Texas Intermediate crude was up 0.5 per cent.
Gold prices rose to a near two-month high on Jun 13, with spot gold up 1.1 per cent at US$3,419.69 an ounce as at 7.25 pm Singapore time, after hitting its highest point since Apr 22.
Defence names and commodities were among the first to react, but how are they set to perform ahead? And what other names or sectors can investors consider – or avoid? The Business Times spoke to analysts.
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Oil and gas names
CGS International analysts Bob Setiadi and Elizabeth Noviana maintained their “neutral” stance on the oil and gas sector, as they believe US trade tariffs would put pressure on global gross domestic product. This would lower overall demand for oil and gas.
“However, with prolonged conflict, oil prices can be pushed into the range of US$70 to US$80 per barrel,” they cautioned in a Monday report. “This would force investors to take higher positions in the oil and gas sector.”
The analysts have an “add” rating on Indonesian oil and gas company Medco Energi Internasional (MEDC), with a target price of 1,250 rupiah. They also have an “add” call on AKR Corporindo, with a target price of 1,410 rupiah, as its core business in petroleum trading has benefited from higher volume and spread.
“For every US$5/barrel oil price movement, we estimate a direct impact of 21 per cent to MEDC’s earnings per share for the year 2025 forward, as the counter is the most sensitive to fluctuations in oil prices,” said Setiadi and Noviana.
George Brown, senior economist at Schroders, said the recent conflict has proved more brutal than other escalations of late, though there continues to be “minimal disruption to the oil market” with the direct exchange of fire between Iran and Israel.
While he acknowledged that the attacks continue to affect energy prices and wider financial markets, the market continues to be “volatile but more contained”.
“Although oil production facilities remain a potential target for Israel, it has yet to target them directly, quite possibly restrained by the knowledge that pushing oil prices higher would damage its relationship with allies, such as the US,” he said.
Be cautious on airlines, airline providers
DBS Group Research analyst Jason Sum cautioned that an escalation in the conflict could prove negative for airlines, in particular.
“Should the conflict escalate, we’re likely to see an even sharper rise in crude oil and jet fuel prices, particularly if there’s disruption to oil infrastructure or shipping lanes like the Strait of Hormuz,” he said.
“This would significantly raise operating costs for airlines, who may respond with capacity cuts and defer maintenance, directly impacting maintenance, repair and overhaul providers like SIA Engineering.”
Sum, however, still has a “buy” rating on SIA Engineering, with a higher target price of S$3.50 in his Jun 13 report.
Gold
Another natural point of consideration at this juncture would be the gold market for investors, but Carsten Menke, head of next-generation research at Julius Baer, does not expect the Israel-Iran conflict to lift prices of gold in a prolonged manner – in line with historical patterns.
“The reaction in the gold market remains moderate, with prices up less than 1 per cent since before Israel’s initial attack,” he said. “We assume that this reaction has been driven by some speculators and trading systems in the futures market rather than by physical safe-haven demand.”
He still, however, reiterates his “constructive” view on gold against this backdrop, given that “conflict as an element supports the prevailing bullish mood in the gold market, while fundamentals remain favourable”.
But considering the contained reactions of Israel’s and Iran’s allies, a spreading of the conflict – which could push gold prices higher – also seems less likely, he said in a note on Tuesday.
Spot gold was trading flat at US$3,387.17 per ounce as at Wednesday, and US gold futures were at US$3,404.05.
In Singapore, the SPDR Gold Shares exchange-traded fund (ETF) has generated a 31 per cent total return in US dollar terms for the 2025 year to Jun 13, said Singapore Exchange market strategist Geoff Howie.
Gold futures closed at US$3,431.20 on Jun 13 in the US, and opened 1.2 per cent higher at US$3,473 per ounce on Monday.
The ETF in particular witnessed the highest amount of net inflows in the year to date through Jun 13 among Singapore-listed ETFs of S$309 million, followed by the Nikko AM SGD Investment Grade Corporate Bond ETF at S$115 million.
Asia ex-Japan, Europe equities signal promise
In a bid to ride out volatility and reap better growth opportunities for one’s portfolio, equities from other regions in Asia and Europe are worth examining, said Aaron Chwee, head of wealth advisory at OCBC.
He said the region’s supportive fiscal and monetary policy environment serves as a positive tailwind – an example being Germany’s 500 billion euro (S$739.5 billion) infrastructure investment on May 22.
“Investors have taken notice, given that European equities have outperformed US equities year to date by around 20 per cent,” he told BT.
Chwee maintains a positive outlook on Asian equities excluding Japan, with a more “defensive” positioning to be adopted moving forward.
“We favour investments in China, Hong Kong and Singapore, as policymakers have the necessary tools to support growth, and valuations remain attractive,” he said.
Other top Singapore-listed ETFs bought by dollar-cost averaging investors as at April 2024 include the Nikko AM STI ETF, ABF Singapore Bond Index ETF, Nikko AM Straits Trading Asia ex Japan Reit ETF and Lion-Phillip S-Reit ETF, said Howie.
As for China, its economy has signalled resilience with the country’s retail sales in April increasing 5.1 per cent year on year, reflecting a slowdown from March’s growth of 5.9 per cent amid cautious consumer spending.
“We favour high-quality yield stocks, internet and platform companies listed in Hong Kong, as well as companies benefiting from favourable policies in China and Hong Kong,” OCBC’s Chwee added.
How is the defence sector set to perform ahead?
The rally in defence stocks is “an exaggerated reaction” to news of renewed conflict in the Middle East, said Morningstar equity analyst Nicolas Owens.
“The dots between military combat and the profit of a defence contractor do not connect nearly as directly as investors seem to imagine,” he said in a Monday note. “Armed conflict does not necessarily benefit defence contractors at its core, especially if the conflict is prolonged and expensive.”
A drawn-out conflict could sap military budgets and divert funds to operations and logistics, and away from research, development and procurement – where defence contractors make the bulk of their money.
“We have not altered our valuations of defence contractors in light of this news, and believe long-term development and resupply of missile defence technology are already baked sufficiently into our forecasts,” Owens stressed.
Therefore, the analyst’s fair value estimate for various defence stocks such as RTX is at US$134 (below its last trading price), with a three-star rating and medium level of uncertainty. Meanwhile, his fair value estimate for US aerospace and defence company Lockheed Martin is at US$539, with a medium level of uncertainty.
