Defense stocks surge 30% due to increased spending

Defense stocks have recently experienced significant gains, rising up to 30% in just a week. This rebound follows a tough period where many stocks in this sector dropped by 50-75% earlier this year. Several defensive companies have shown remarkable growth. For example, Mazagon Dock Shipbuilders soared by 183% from its low, while Garden Reach Shipbuilders & Engineers jumped 126%. Despite these increases, many stocks remain below their previous highs. Analysts caution that this surge may only be a temporary relief rather than a sustainable trend. A strong local market is contributing to this surge. In March, India's Defense Acquisition Council approved proposals worth ₹54,000 crore, part of a larger push for domestic defense procurement. The Indian government is also speeding up its procurement process, cutting it from two years to just six months, which benefits companies like Hindustan Aeronautics and Bharat Electronics. Globally, military spending has also increased significantly. In 2024, worldwide defense budgets reached $2.46 trillion, showing a real growth of 7.4%. Countries in Europe are particularly ramping up their defense expenditures due to NATO pressures and geopolitical tensions. However, experts warn that direct benefits for Indian defense companies from global spending may be overestimated. The Indian defense sector focuses on local production and modernization rather than exports. Companies in South Korea and Japan are more likely to secure European defense contracts. While the current upward momentum in defense stocks might continue in the short term, investors should consider the potential for market corrections. Most defense stocks are currently trading at a moderate valuation, and analysts suggest it may be better to buy on dips than chase the ongoing rally.