The South China Sea conflict has largely been a case of ‘failure to act’ while the law of the sea has been flouted. China continues to exert military control over its neighbours with respect to the hotly contested waterways, in a completely uninhibited manner. The US has largely taken a neutral stance despite the 12 July 2016 ruling that saw an independent arbitration tribunal, established under the UN Convention on the Law of the Sea (UNCLOS), publish a clear and binding ruling on China’s claims vis-à-vis the Philippines in the South China Sea.

Enough is enough. Over the weekend, the US drew a line in the sand and declared China’s territorial grab illegal, and called for its neighbours – the Philippines, Vietnam, Malaysia and Brunei – to stand their ground. A US statement said, “We are making clear: Beijing’s claims to offshore resources across most of the South China Sea are completely unlawful, as is its campaign of bullying to control them.”

In response the aircraft carriers USS Nimitz and USS Ronald Reagan and their strike groups are now operating in the South China Sea. The United Kingdom has announced that next year, the Royal Navy’s new aircraft carrier HMS Queen Elizabeth will also be deployed to the region, to counter an increasingly aggressive China. Allies Japan, Australia and Canada, will also be invited to provide escort warships or submarines to complete the flotilla (the Royal Australian Navy has already joined US vessels on “freedom of navigation” voyages in international waters in the South China Sea.) As always, a peaceful outcome is always favoured in such tense situations. In this piece however, we look at six stocks that stand to benefit from a military conflict in the South China Sea.

The lead-up to a conflict is usually the most volatile because of the uncertainty. But when the eventual outbreak of war occurs, share prices usually rise as the market realises that a material impact on the economy is unlikely. There is a group of stocks that are positively skewed towards war such as military equipment manufacturers and military technology companies. Here are our six stock picks:

1. Austal Limited (ASX: ASB) – Austal is an Perth-based ship builder that has a primary contract to design and build two classes of combat vessels for the US Navy, at its Alabama. Austal is the only foreign company ever to have designed and built warships for the US Navy. Its flagship vessel is the Littoral Combat Ship (LCS), which is a high-speed, agile and multi-mission combatant that delivers superior sea-keeping and performance. With an order book of $4.9 billion, a track record of timely delivery and the potential for military conflict in the South China Sea, this is a company that sits in prime position for a rerating.
2. Lockheed Martin (NYSE: LMT) – LM is a US-listed defence, arms, security, and advanced technologies company. It is the Pentagon’s biggest contractor, having built the F-22 Raptor and F-35 Joint Strike Fighter. With Lockheed Martin having won $3.2 billion in contracts in June, to give it a workbook of around $140 billion, the company could be expected to thrive during this conflict.
3. Northrop Grumman (NYSE: NOC) – Northrop Grumman ranks as one of the world’s largest weapons manufacturers and military technology providers. It is also the prime contractor for the Joint Surveillance Target Attack Radar System (Joint STARS), an advanced airborne surveillance and prime contractor for the B-2 stealth bomber.
4. Boeing (NYSE : BA) – Boeing is a defence business as well as an airline manufacturer. The company designs and manufactures helicopters for the US military. Definitely a stock to watch.
5. General Dynamics (NYSE:GD) General Dynamics is a shipbuilder, similar to Austal, and also has a portfolio of tanks and land combat vehicles, making it one of the go-to vendors for the US military. General Dynamics also has one of the largest defence-focused IT and services businesses, giving it some revenue stability at times when the Pentagon is cutting back on equipment purchases. Going back in history, this company has assisted the US in multiple wars. But while the US is spending close to $732 billion for its defence budget, this military manufacturer will benefit from a surge in military work.
6. Raytheon Technologies (NYSE: RTX) – Raytheon is a missile-defence system builder, but also a leader in radar systems and electronic/cyber warfare. The company has assisted the US Army on multiple occasions and recently merged with UTX’s aerospace businesses. As modern technology advances, Raytheon will be at the forefront working to bring those technologies to the battlefield.