What to buy as China flexes its muscles

As Asia becomes richer, more money will be ploughed into defence. Smart investors should place their bets now, say James McKeigue and Jonathan Erridge. Here, they tip the best defence stocks to buy.

In the East China Sea, northeast of Taiwan and southwest of Okinawa (Japan's most southerly prefecture), lie eight uninhabited rocks. The Japanese, who control the islands, know them as Senkaku. The Chinese, who claim the islands for Taiwan, call them Diaoyu. The rocks themselves are of little interest. But they are surrounded by rich fishing grounds and potentially huge gas and oil deposits. That's why Japan and China are at loggerheads over them.

The dispute stretches back at least four decades, but this week took a potentially dangerous turn. Japan paid $26.1m to buy three of the islands, which it had been renting from the Japanese family that has owned them since the 1970s. This enraged China: its main military newspaper, the People's Liberation Army Daily, called the move "the most serious provocation against China's territorial sovereignty since the end of the second world war", reports the Financial Times.

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James McKeigue

James graduated from Keele University with a BA (Hons) in English literature and history, and has a certificate in journalism from the NCTJ. James has worked as a freelance journalist in various Latin American countries.He also had a spell at ITV, as welll as wring for Television Business International and covering the European equity markets for the Forbes.com London bureau. James has travelled extensively in emerging markets, reporting for international energy magazines such as Oil and Gas Investor, and institutional publications such as the Commonwealth Business Environment Report. He is currently the managing editor of LatAm INVESTOR, the UK's only Latin American finance magazine.