Markets Bet on Defence Boost
- Japanese defence and shipbuilding stocks shot up ahead of President Donald Trump’s meeting this week with Japan’s new prime minister Sanae Takaichi. Markets are clearly betting on higher defence spending and stronger US‑Japan industrial cooperation, especially in shipbuilding.
- Kawasaki Heavy Industries shares rose nearly 9.5%, their biggest gain since October, while IHI climbed 4.2% and Mitsubishi Heavy Industries moved up 3.6%. On the smaller side, shipbuilders saw even larger jumps: Zaikai Zone +17%, Namera Shipbuilding +11%, Mitsui E&S Co. +8.7%, and Tokyo Keiki +7.8%. All of these dramatically outpaced the broader TOPIX’s advance of about 1.7%.
- Reports indicate the US and Japan are preparing to announce joint actions in shipbuilding, defence procurement and technology. While the new PM is promising the world, I remain sceptical. These stocks now trade at elevated multiples, Kawasaki Heavy, for instance, is nearing 24‑25x forward earnings, well above its 5‑year average around 15x. That premium implies a lot of future success is already priced in.
The Cordoba View
- We believe this rally is driven more by expectations than actual contracts. Yes, Japan is giving stronger signals on defence, but translating that into sustained revenue for contractors takes time. The market is playing for a big capture of future deals already, and that heightens risk if policy translation lags.
- From an allocation perspective, we are not mandated to invest in defence companies, but we’re closely tracking developments.
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