Why are ASX defence stocks so hot right now?

Some defence stocks have soared nearly 400% this year.

Military engineer works on drone

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Key points

  • ASX-listed defence stocks, including DroneShield, Electro Optic Systems, and Titomic, have seen substantial gains due to geopolitical tensions and increased government defence spending, with DroneShield up 394.83% for the year.
  • Heightened global tensions, particularly involving trade relationships with China and US tariff policies, are driving defence investments in advanced technology and equipment, benefiting companies in this sector.
  • Analysts remain optimistic about continued growth, with Bell Potter and Macquarie projecting significant upsides for defence stocks and ETFs, backed by substantial Australian government investment in defence.

ASX-listed defence stocks are soaring right now, as investors scramble over themselves to get in on the action.

ASX defence stocks storm higher

Over the past month alone, DroneShield Ltd (ASX: DRO) shares have jumped 76.99% to $5.77 per share, at the time of writing. For the year, the counter-drone technology company's share price is 394.83% higher.

Although DroneShield's success story is in a league of its own, many other ASX-listed defence stocks have seen their share price storm higher this year.

Electro Optic Systems Hldgs Ltd (ASX: EOS) has been another strong performer this year. While the share price has fallen 4.33% to $7.00 a piece over the past month, the decline has barely dented its 335.4% hike over the past 12 months. 

Meanwhile, the Titomic Ltd (ASX: TTT) share price has climbed 12.96% over the past month and is now 117.86% higher for the year. At the time of writing, the Titomic share price is 30 cents per share.

Australian-based global shipbuilding company Austal Ltd (ASX: ASB) has seen its share price drop 12.47% to $7.03 a piece over the past four weeks, at the time of writing. Over the year, it is still 130.49% higher. 

The Vaneck Global Defence ETF (ASX: DFND) share price has climbed 5.91% over the past month. It is now 82.52% higher than this time last year. At the time of writing, it is trading at $39.06 per share. 

At the time of writing, the Betashares Global Defence ETF (ASX: ARMR) is $26.07 a piece, up 1.47% over the month and 67.44% over the year.

It's clear that shares in the sector are gaining significant traction, but the real question is: why the sudden surge in popularity?

Why are these stocks gaining momentum?

There are a few reasons, but the key one is the ongoing geopolitical uncertainty. Heightened global tensions and increasing risk are mostly related to trade relationships.

For example, US President Trump's trade tariffs are set to cause global trade tensions and disrupt supply and demand chains around the world. Elsewhere, China is the largest direct geopolitical risk for Australia. This is because it is both our largest trading partner and our largest competitor. Australia is also at risk of being dragged into tensions in the Indo-Pacific region. Any disruption would affect trade routes and even defence assets.

In turn, these geopolitical risks push governments to spend more on their defence sector. This includes development of technology such as drones, AI or electronic warfare. It also includes equipment such as missiles or submarines. 

Earlier this year, the Australian Government announced it would invest an additional $50.3 billion into the Australian Defence Force. 

It's a significant allocation of Government funds, and it is likely to create a reliable and long-term revenue for companies in the defence sector. And of course, a reliable income is beneficial for investors.

Can we expect ASX defence shares to keep climbing?

Analysts think so.

Earlier this month, Bell Potter listed Droneshield shares as one of its best buys. The broker commented that the ASX stock is in a strong position in a booming industry. 

The broker has also recently updated its price guidance on EOS shares to $11.20, which represents a potential 60% upside for investors at the time of writing. Bell Potter also sees a potential 66.7% upside for Titomic shares over the next 12 months, to 50 cents per share.

Meanwhile, Macquarie has a $7.95 target price and a neutral rating on Austal shares, which represents a potential 13.1% upside over the next 12 months, as of the time of writing.

The DFND and ARMR ETFs were also recently highlighted by fellow Fool writer Leigh Gant as top defence ETF options for investors.

Both ETFs are designed to focus exclusively on companies headquartered in NATO or allied nations. This means investors can get access to businesses in the core global defence supply chain. 

This includes traditional hardware, like fighter jets, submarines, and missile systems, as well as advanced software, space technologies, and next-generation intelligence platforms.

Motley Fool contributor Samantha Menzies has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended DroneShield and Electro Optic Systems. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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