Indo-Pacific Tensions Rise — Is Defence Tech the Next Sector to Surge?

As the geopolitical chessboard in the Indo-Pacific becomes increasingly volatile, markets are watching for signals of where capital might flow next. With security alliances tightening and defence budgets swelling, we believe the Defence Tech sector could be positioned for growth. The question investors are asking is whether this surge will be sustainable or just another short-lived thematic.

 

The Geopolitical Fuse: What’s Driving the Heat?

The Indo-Pacific region is witnessing a sharp uptick in military posturing. Tensions between China and Taiwan flared again in 2025, with PLA incursions averaging roughly 250–260 sorties per month in Q1 2025, while the record remains the 3,615 sorties logged in full-year 2024. Meanwhile, defence pacts like AUKUS, the trilateral alliance between Australia, the US, and the UK, have accelerated strategic collaborations, especially around submarines, AI, and cybersecurity. We’re not talking about distant sabre-rattling. We’re talking about defence contingencies, reshaping national budgets and investment strategies.

According to the Stockholm International Peace Research Institute (SIPRI), Asia and Oceania accounted for 23% of global military spending in 2024, totalling US$ 629 billion, with Australia’s defence budget alone hitting AUD 55.7 billion, a 5–6% year-on-year increase. In our view, this level of commitment signals structural growth rather than cyclical spending.

 

Why the Market’s Turning to Defence Tech

So, what are Defence Tech stocks, and why are they suddenly lighting up investor radars?

Defence Tech refers to companies developing military-grade technologies such as autonomous drones, surveillance systems, hypersonics, and secure communication software. These are no longer niche plays. We’re seeing civilian tech giants pivot toward defence contracts, while traditional defence contractors are integrating cutting-edge software, making the space more dynamic.

Global investment in defence startups surged to over US$31 billion in 2024, reflecting a clear shift in where capital is flowing. From quantum computing to AI-enabled battlefield systems, this is not just defence — it’s deep tech with national significance.

 

Australian Exposure: Which ASX Stocks Are in the Crosshairs?

Australia may not be the first name that comes to mind when thinking of global defence superpowers, but its strategic geographic location and tightening alliances are placing its defence companies on investors’ radars. With a government strongly committed to the AUKUS alliance and rising defence procurement, we believe a handful of ASX-listed stocks could emerge as the quiet outperformers of 2025.

Electro Optic Systems (ASX: EOS)

EOS is one of the best-known defence names on the ASX, and for good reason. It designs, manufactures, and exports advanced technology systems, including satellite communications, remote weapons stations, and space domain awareness tools. After struggling with cash flow issues in 2022–23, EOS restructured and secured major contracts, including a multi-year agreement with the US Department of Defence.

In 2024, EOS reported AU$ 176.6.6 million in revenue, a 9% increase year-on-year, and reduced its EBITDA loss significantly. Analysts are optimistic about the satellite communications arm, which now services both defence and commercial clients across Europe, the Middle East, and Asia. With the US military continuing to modernise its systems, we see EOS as a high-risk, high-reward option for investors seeking leverage to geopolitical tech trends.

DroneShield (ASX: DRO)

DroneShield is another standout, a rare listed player in the anti-drone and electronic warfare niche. Its patented drone detection and neutralisation systems are gaining global traction. In FY2024, DroneShield posted record revenue of AU$ 57.57.5 million, representing a 6% increase from the previous year, along with positive EBITDA, a significant milestone for a company often viewed as speculative.

Recent contract wins include an AU$ 33 million government order and strong ongoing interest from Five Eyes nations. We believe DroneShield’s clear focus on R&D and recurring software-as-a-service (SaaS) revenues makes it a unique mix of traditional defence and modern tech, the kind of hybrid the market is currently rewarding.

Codan (ASX: CDA)

Codan operates in both metal detection and communications, but its tactical military radios segment is gaining serious traction. In 2024, the company secured a US$8.5 million contract from a Five Eyes partner, further validating its growing defence credibility. Codan’s radios are known for being robust, portable, and encryption-secure, critical in modern warfare and peacekeeping missions.

Financially, Codan stands out with strong free cash flow and consistent dividend payouts, which make it attractive to conservative investors seeking defence exposure without the rollercoaster volatility seen in some peers. Its operating margins of 21.6% in FY24 signal solid operational discipline.

 

Global Benchmarks: How Are Overseas Players Performing?

Looking beyond the ASX, defence tech giants like Lockheed Martin, Northrop Grumman, and RTX (formerly Raytheon) are trading at steady valuations. But smaller, more agile players like Anduril (a US-based startup founded by Palmer Luckey) and Helsing AI (backed by Spotify founder Daniel Ek) are showing where innovation is headed.

Interestingly, venture capital interest in defence AI and automation is mirroring the rise of cybersecurity in the early 2010s. As a result, institutional investors are beginning to carve out thematic exposure to defence via ETFs and bespoke portfolios. The iShares U.S. Aerospace & Defence ETF (ITA) has returned 24.2% YTD as of June 17, 2025, significantly outperforming the broader S&P 500.

 

Risks Investors Should Watch

Of course, the sector isn’t without risk. Defence Tech is still vulnerable to:

• Regulatory Overhang: Changes in export rules or government procurement can impact earnings outlooks overnight.
• Ethical and ESG Concerns: Weaponisation of AI and military automation remains controversial, deterring some institutional flows.
• Budget Volatility: Although current budgets are rising, a shift in political priorities could throttle funding, especially in post-election cycles.

That said, we believe many of these risks are already priced in for ASX defence stocks, particularly the microcaps, which have been trading at steep discounts due to past performance concerns.

 

What’s the Outlook? Is It Time to Load Up?

In our view, the Defence Tech sector in Australia offers investors a rare confluence of macro tailwinds, government backing, and long-term demand visibility. We’re not just talking about a war trade, we’re talking about structural innovation tied to national sovereignty and cybersecurity.

With Australia strengthening ties with key partners like Japan, India, and the US, local defence contractors could become vital links in future-ready military supply chains. Investors with medium-to-long-term horizons may find asymmetric opportunities in defence tech, especially among overlooked mid-cap names.

 

What are the Best ASX stocks to invest in right now?

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FAQs

• What is Defence Tech, and how is it different from traditional defence stocks?

  Defence Tech refers to firms using advanced technologies like AI, drones, and satellite communications for military use. Unlike traditional arms manufacturers, Defence Tech companies are more focused on software, data analytics, and next-gen systems.

• Why is there a sudden investor interest in Defence Tech stocks in 2025?

  Geopolitical instability in the Indo-Pacific, higher defence spending, and tech innovation are converging. As a result, both governments and investors are allocating more capital toward security technologies.

• Are there any ETFs in Australia that offer exposure to Defence Tech?

  While Australia doesn’t yet have a pure-play Defence Tech ETF, global ETFs like ITA (iShares US Aerospace & Defence) can be accessed via international trading platforms. Some ASX-listed diversified funds also hold defence-related stocks.

• What’s the biggest risk of investing in this sector?

  Political shifts, regulatory restrictions, and public opposition to defence spending are all risks. Plus, Defence Tech firms often rely on lumpy contracts, which can make earnings volatile.

• How should investors approach small-cap Defence Tech stocks?

  Cautiously but not dismissively. Look for revenue momentum, solid order books, and government contract exposure. Companies like DroneShield and EOS offer potential, but carry more volatility than larger peers.