Defence stocks are drawing investor interest as the war in Iran sends oil prices swinging and adds to market volatility, according to one analyst.
After the VIX volatility index, often called the “investor fear gauge,” jumped six points to nearly 30 on Friday, oil prices surged over the weekend to around US$120 before dropping sharply. By Tuesday, oil had fallen to US$84.
Amid that volatility, defence names in both Canada and the U.S. appear to be doing well, says Kelsey Keane, director of equity capital markets at National Bank of Canada.
“Investors seem to like the long, stable contracts, and also there is a thematic around more government spending in those sectors,” said Keane.
Keane said the defence sector is standing out at a time when it has been difficult for investors to stick with one clear market theme. For much of the year, energy and materials stocks performed well on stronger commodity prices, but those trades have become less reliable as markets react quickly to geopolitical headlines and then just as quickly move on.
She said a brief move into stable income names such as utilities also appeared short-lived.
“It’s been really hard to pick a thematic,” Keane said.
She pointed to the sharp moves in both oil and the VIX over just a few days as a sign of how nervous markets still are.
“One thing that I can say that seems to be certain for the next little while is we will see volatility,” she said.
She said the immediate concern from the weekend oil spike was that it could add to inflation at a time when the economy was already showing signs of weakness. Keane noted that oil prices were rising rapidly just as a U.S. jobs report on Friday showed weaker-than-expected income numbers,
“All that really stoked a lot of fears amid investors,” said Keane.
Keane said the market’s recent moves suggest investors increasingly believe geopolitical shocks may be short-lived.
“To me that shows that there’s a little bit of a look through on what’s happening right now,” Keane said.
She said Canadian energy stocks have not seen the same uplift in the spike in oil prices over the weekend even after there was a lot of attention on Canadian oil producers earlier this year.
“I think we’ll just have to wait and see how everything plays out,” said Keane.
