South Korean Defense Stocks Surge to Valuations Far Above Global Peers

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Economic

Summary:

Shares of South Korea’s defense companies have soared between 70% and 300% in 2025, pushing valuations to multiples far exceeding those of US giant Lockheed Martin...

Rapid Price Gains Outpace Fundamentals

Hanwha Aerospace, LIG Nex1, Hyundai Rotem, Korea Aerospace Industries (KAI), and Hanwha Systems have all seen sharp share price increases this year, driven by optimism over rising global defense budgets and South Korea’s growing arms exports. The rally has lifted their price-to-earnings ratios (PER) well beyond historic norms, with Hanwha Systems at 61, LIG Nex1 at 44.1, KAI at 37.1, Hanwha Aerospace at 32.1, and Hyundai Rotem at 23.5. By comparison, Lockheed Martin’s PER is projected at 19.6 in 2025.

Even with forecasts for a slight pullback in 2026 Hanwha Systems at 38.5, LIG Nex1 at 33.9, KAI at 24.7, Hanwha Aerospace at 23.1, and Hyundai Rotem at 21.6 the multiples remain well above Lockheed Martin’s projected 14.7. A similar gap appears in EV/EBITDA ratios: LIG Nex1 stands at 28.5, Hanwha Systems at 27.6, KAI at 21.3, Hyundai Rotem at 19.3, and Hanwha Aerospace at 13, compared to 12.8 for Lockheed Martin. These figures indicate South Korean defense firms are trading at valuations significantly higher than their current earnings or cash flow would justify.

Earnings Growth and Market Risks

In Q2 2025, the combined operating profit of the four largest contractors Hanwha Aerospace, Hyundai Rotem, LIG Nex1, and KAI exceeded 1 trillion won (about USD 719 million) for the first time, supported by a surge in backlogged orders. However, much of the anticipated export revenue has yet to be converted into actual sales. This creates a correlation between current stock prices and future delivery performance; if revenues materialize slower than expected, the rapid run-up in share prices could reverse, leaving valuations exposed.

Analysts note that while the structural growth in defense demand supports long-term expansion, the present premium pricing embeds aggressive assumptions about contract execution and profit margins. The gap between market capitalization and realized earnings potential suggests that, without continued strong order fulfillment and sustained export momentum, South Korean defense stocks may struggle to maintain their elevated levels.

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Economic

Commodity

Asian Rice Market Under Pressure

India’s 5% broken parboiled rice fell to 369–374 USD/ton this week, its lowest since August 2022, down from 375–380 USD last week. White rice of the same grade is priced at 360–368 USD/ton. According to B.V. Krishna Rao, head of the Rice Exporters Association, the rupee’s weakness has allowed exporters to cut prices and remain competitive, though US demand could fall after President Donald Trump announced a tariff hike to 50% on Indian imports effective August 28, 2025.

Vietnam’s 5% broken rice is now at 391 USD/ton, down from 395–400 USD last week, pressured by the Philippines’ decision to suspend imports to protect domestic farmers. In Thailand, prices for the same grade hold steady at 370 USD/ton, but buyers are delaying decisions amid India’s plan to release up to 7 million tons from reserves.

US Grain Futures Weighed by Abundant Supply Outlook

On August 8, Chicago Board of Trade wheat futures fell 3.75 cents to 5.145 USD/bushel, corn lost 1.5 cents to 4.055 USD/bushel, and soybeans dropped 6.25 cents to 9.875 USD/bushel. Weekly US export data came in stronger than expected, suggesting low prices are stimulating demand. Recent corn sales to Mexico, Guatemala, and other buyers provided partial support, along with pre-report buying ahead of the USDA’s monthly supply-demand update due August 12.

Analysts expect the USDA to raise corn production forecasts given favorable growing conditions, which could deepen supply pressure despite short-term demand recovery. The interplay between strong crop outlooks and demand spikes is keeping market sentiment volatile.

Coffee Prices Surge on Tightening Supply

Coffee markets rallied sharply on August 8, with London robusta for September delivery up 143 USD to 3,561 USD/ton, and New York arabica for September up 11.55 cents to 309.35 cents/pound. Brazil’s July green coffee exports fell 20.4% year-on-year to 161,000 tons, adding to supply tightness.

A stronger Brazilian real, at a one-month high, also discouraged exporter selling. Vietnam’s domestic coffee prices have surged, with average prices reaching 103,800 VND/kg, up 2,200 VND in a single day. This reflects a direct relationship between tightening global supply and rising domestic farmgate prices, reinforcing the bullish short-term outlook for the coffee market.

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Economic

Consumer Prices Hold Steady Amid Food Price Decline

Official data from the National Bureau of Statistics shows China’s July consumer price index (CPI) unchanged from a year earlier, outperforming Reuters’ forecast of a 0.1% drop. The stability came despite a 1.6% year-on-year fall in food prices larger than June’s 0.3% decline highlighting subdued consumer spending. Severe weather also added stress to the economy. On a month-on-month basis, CPI edged up 0.4%, with core inflation, excluding volatile food and energy, rising from 0.7% in June to 0.8% in July.

The producer price index (PPI) fell 3.6% year-on-year in July, deeper than economists’ 3.3% forecast and matching June’s drop the steepest since July 2023. This marks over two years of continuous PPI contraction, underscoring ongoing industrial overcapacity and price competition pressures. Initial government measures to curb aggressive price-cutting in key industries have yet to yield meaningful results. Current restructuring efforts are smaller in scale compared to the sweeping supply-side reforms a decade ago that helped reverse deflation at the time.

Structural and External Headwinds

Beyond price trends, the macroeconomic environment remains fragile. A prolonged property sector downturn continues to weigh on household spending and industrial activity, while a fragile “trade truce” with the United States leaves manufacturing sentiment vulnerable to renewed tariff risks. These conditions reinforce the link between weak domestic demand and sustained producer price deflation, though the relationship remains shaped by both cyclical pressures and structural industry imbalances.

Rather than deploying broad-based stimulus, policymakers appear focused on containing what they call “disorderly competition” in sectors such as automotive manufacturing. Analysts, however, doubt that such targeted interventions will significantly boost consumer purchasing power. Without a stronger demand-side push, the combination of stagnant CPI and prolonged PPI deflation may keep China’s recovery on an uneven path, with persistent downside risks to growth in the second half of 2025.

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Tariff Pressure Hits the Auto Industry

After a strong first half of the year, US car sales are showing signs of cooling as tariffs begin to weigh on the market. According to Yale University research, the nationwide average tariff rate will climb above 18% from August 7 under the administration’s latest trade measures. New agreements with the European Union and Japan have set a base 15% tariff on cars six times higher than the 2.5% rate that brands like Toyota and Mercedes paid before April 2025.

Automakers initially absorbed the higher costs to shield buyers but can no longer sustain these losses. General Motors paid 1.1 billion USD in tariffs in Q2 alone and projects up to 5 billion USD for the year, reflecting its extensive supply chain ties with Canada, Mexico, and South Korea. Ford has increased its estimated profit loss from tariffs to 2 billion USD, while Hyundai expects a 606 million USD hit, Volkswagen 1.5 billion USD, and Stellantis 1.7 billion USD.

The financial strain is prompting manufacturers to pass costs on to dealerships and buyers. Ford has already raised prices for models imported from Mexico, such as the Bronco Sport and Mustang Mach-E, while luxury brands like Porsche are also adjusting pricing.

Consumer Impact: Higher Payments and Fewer Options

The average new car price, at 48,907 USD in June, is projected to surpass 50,000 USD by year’s end. Edmunds reports that 19.3% of buyers now have monthly auto loan payments exceeding 1,000 USD, a record high. Combined with rising repair and insurance costs, vehicle ownership is becoming more burdensome, particularly for younger and lower-income buyers.

Beyond affordability, model diversity is shrinking. To protect profit margins, manufacturers are prioritizing higher-margin pickup trucks and SUVs while scaling back production of small, low-cost sedans. This trend limits choices for budget-conscious consumers and could permanently reshape the vehicle mix in the US market.

Electric Vehicles Under Threat

Electric vehicles face the sharpest contraction as federal policy shifts away from EV incentives. The 7,500 USD EV tax credit will expire on September 30, and several automakers are canceling or delaying EV programs to avoid high development costs. This comes as much of the global automotive industry accelerates EV investment, leaving the US at risk of falling behind in the sector’s technological race.

A Bank of America analyst warns that the next four years will be among the most unstable in the history of US automakers’ product strategies. The combination of higher tariffs, shifting consumer demand, and global competition is creating a volatile environment that will challenge both industry profitability and consumer affordability.

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Widespread Impact Across Global Markets

The latest tariff package from Washington has triggered urgent diplomatic and economic responses worldwide. Switzerland, facing a 39% levy after last-minute talks by President Karin Keller Sutter failed, warned of substantial strain on its export-driven economy and is seeking fresh negotiations. Brazil, hit with the steepest rate at 41%, is preparing support measures for affected companies.

Some partners have secured partial relief through direct talks or new trade deals. Taiwan’s 20% tariff is described by President Lai Ching-te as temporary, while Ireland subject to a 15% duty plans to diversify an economy heavily reliant on US multinationals such as Intel, Pfizer, and Johnson & Johnson. Lesotho, despite a last-minute cut from 50% to 15%, continues to suffer severe damage in its textile industry, with canceled orders and job losses caused by months of tariff uncertainty.

Preferential Arrangements and Sectoral Exceptions

The UK, Thailand, Cambodia, Indonesia, the Philippines, Japan, South Korea, Pakistan, and the European Union have reached agreements to secure lower rates. The EU stands out as the only partner on the baseline 15% tariff, covering previous levies, although implementation is partial. Importantly, a 27.5% tariff still applies to EU-made cars, highlighting sector-specific frictions even under negotiated terms.

India’s 25% tariff could effectively double to 50% following Trump’s August 6 executive order targeting the country’s purchases of Russian oil. New Delhi has 21 days to respond, with the outcome likely to influence broader trade and geopolitical dynamics in Asia.

The disparity in outcomes reflects a correlation between a country’s negotiating power, the strategic importance of its exports to the US, and Washington’s broader geopolitical objectives. Countries with strong bilateral leverage or complementary economic ties to the US have managed to limit the damage, while those without comparable influence face steeper costs. The current tariff wave signals a shift toward more transactional trade policy, in which relief is contingent on immediate concessions or strategic alignment.

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Political

Shift in Russia’s Oil Export Strategy

Russia is moving aggressively to sell Urals crude to China at a reduced discount of 1.50 USD per barrel compared to Brent, down from 2.50 USD last week. The change reflects Moscow’s urgent search for alternative buyers after India its largest Urals customer for over two years pulled back from purchases. The shift is tied to Washington’s latest trade measures, with President Donald Trump imposing an additional 25% tariff on Indian goods, including Russian oil imports to India, alongside a broader 50% tariff set to take effect later in August.

In response to the impending tariff hike, India’s top state-owned refiners cancelled spot orders for October deliveries from Russia, instead securing at least 22 million barrels of non-Russian crude from suppliers in the US, Middle East, and Canada for September and October. This marks a reversal from a period when India capitalized on significant Urals discounts, which surged in importance after Western sanctions restricted Moscow’s access to European markets.

Logistical and Market Constraints in China

While China is Russia’s largest overall oil buyer, its refineries predominantly process ESPO crude shipped from Kozmino in the Far East, benefiting from shorter transport routes and lower costs. Shipping Urals from Russia’s western ports, such as Primorsk and Novorossiysk, to China is far costlier and has historically limited its presence in the Chinese market. Even with the deeper discounts, Chinese refiners may not absorb the full volumes previously purchased by India, as they already have stable supplies from ESPO, the Middle East, and Africa.

Industry analysts note that the mismatch between surplus Urals supply and China’s absorption capacity creates a potential oversupply scenario in Asia. If Russia fails to secure additional buyers possibly in Turkey, Brazil, or select African states excess Urals could pressure Brent prices downward. However, a successful diversification of export destinations could soften the impact on global benchmarks.

This sudden pivot underscores the vulnerability of Russia’s oil trade to geopolitical and tariff shifts. The loss of India as a major Urals outlet forces Moscow to navigate higher shipping expenses, competitive price negotiations, and the risk of losing market share to other suppliers. The coming months will test Russia’s ability to reposition its export flows without triggering broader price declines that could further strain its energy revenues.

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A Breakthrough in a Long-Standing Conflict

On August 8, at the White House, President Donald Trump hosted the signing of a peace agreement between Azerbaijan’s President Ilham Aliyev and Armenia’s Prime Minister Nikol Pashinyan. The pact marked a decisive step toward full normalization of relations after more than three decades of animosity rooted in the Nagorno-Karabakh dispute. Since the late 1980s, the mountainous enclave, inhabited mostly by ethnic Armenians, had been at the center of armed conflict. Azerbaijan’s military operations in 2023 regained control of the territory, triggering the exodus of nearly 100,000 ethnic Armenians to Armenia.

The agreement commits both nations to halt hostilities, expand diplomatic engagement, and respect each other’s territorial integrity. A key component grants the United States rights to develop a strategic transit corridor through the South Caucasus, aimed at facilitating energy and resource exports. In parallel, Washington signed separate deals with each country to boost cooperation in energy, trade, and technology, and lifted restrictions on defense collaboration with Azerbaijan.

The corridor’s geopolitical value lies in its location bordering Russia, Europe, Turkey, and Iran, and intersected by vital oil and gas pipelines. This new connectivity could strengthen Western economic and logistical footholds in the region, prompting unease in Moscow, which has traditionally wielded influence there.

Western Leverage and Sanctions Enforcement

Analysts argue that the deal enhances Western capacity to prevent Russia from evading sanctions. According to sanctions expert Brett Erickson, the Caucasus has been a weak point in enforcement efforts, and formalized peace will enable closer cooperation with Yerevan and Baku to block routes used for sanctions circumvention.

Experts caution that the sustainability of this breakthrough will depend on consistent US engagement. Tina Dolbaia of the Center for Strategic and International Studies noted that Russia is likely displeased at being excluded, while independent analyst Olesya Vartanyan warned that without ongoing US involvement, the peace could falter as past negotiations have repeatedly failed.

The White House has presented this as part of Trump’s second-term strategy to position himself as a global peace broker, citing earlier mediations such as ceasefire arrangements between Cambodia and Thailand, and peace agreements between Rwanda and the Democratic Republic of Congo, and between Pakistan and India. Leaders of Armenia and Azerbaijan praised Trump’s role in ending the conflict and pledged to nominate him for the Nobel Peace Prize.

Despite this diplomatic success, Trump has yet to resolve other major conflicts, including the Russia–Ukraine war and the Israel–Hamas confrontation in Gaza. On August 8, he announced plans to meet Russian President Vladimir Putin in Alaska on August 15 to discuss ending the war in Ukraine.

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