The Russia-Ukraine war has motivated private and institutional investors, as well as superannuation funds, to reinvest in ASX All Ords defence shares and energy shares, according to a new study.
Investors began shunning these two sectors a while back due to "a growing focus on environmental, social, and corporate governance (ESG) factors in investment decisions", according to Deakin University, which conducted the study.
They're now happy to reinvest in defence and energy because big businesses in these sectors are now proactively mitigating their greenhouse gas emissions and formally reporting on sustainability goals.
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Why are investors returning to defence and energy?
The 'growing international appetite' for international and ASX All Ords shares in these sectors is primarily due to the strong prospects for investment returns, according to the research.
However, investors are also feeling more ethically comfortable investing in these sectors again.
Of defence stocks, Deakin Business School Associate Professor and researcher, Harminder Singh said:
… the Russia-Ukraine war has meant many countries are moving to invest in their sovereign defence capabilities. Countries want to be able to defend themselves in case there are wider ramifications from the conflict.
This makes stocks in the defence sector more appealing for investors. With more government money pouring in, there are more investment opportunities and the potential to earn greater stock returns.
Investing in defence stocks can now be reframed in the more acceptable context of national security and community safety.
Published in the journal Finance Research Letters, the research is based on a sample of global investment data. The numbers cover a three-year period from April 2019 to May 2022.
Singh added his thoughts on energy shares:
Russia is one of the world's major oil exporters, so the conflict and subsequent sanctions has left a gap in the market that needs to be met. This means other countries are developing their own alternative energy projects, offering the opportunity for greater investment and stock returns.
Like defence, the energy sector has faced ESG concerns. But we're seeing that view can change, as global pressures change.
Associate Professor Singh said the trend toward defence and energy shares might remain "for at least a couple of years, depending, as time tells, whether it is the financially fruitful move that investors hope".
Examples of ASX All Ords shares in defence
The ASX defence sector is fairly small with most stocks not in the ASX 200. But a few ASX All Ords shares in the sector have been going gangbusters in 2022 compared to the broader market.
In 2022 so far, the S&P/ASX All Ordinaries Index (ASX: XAO) has lost 13% in value. By comparison, defence shipbuilding company Austal Ltd (ASX: ASB) is up 21% in the year to date at $2.40 per share.
Some ASX defence shares are down.
ASX All Ords share Codan Limited (ASX: CDA) is down 49% in 2022.
Outside the ASX All Ords, military aircraft components manufacturer Quickstep Holdings Limited (ASX: QHL) is down 10% in 2022. DroneShield Ltd (ASX: DRO) is up 8% in the year to date at 20 cents per share.
Examples of ASX All Ords shares in energy
The stalwarts of the ASX energy sector include Woodside Energy Group Ltd (ASX: WDS), up 56% in 2022. There's also Santos Ltd (ASX: STO), up 15% in 2022, and Beach Energy Ltd (ASX: BPT), up 21%.
