Macro Intelligence: the rise of
ASX-listed defence stocks

Deep-dive into defence

In this week's edition of IG Macro Intelligence, we take a deep dive into ASX-listed defence stocks amid ongoing geopolitical uncertainty.

Boosting arms

Global defence spending is on the rise, amid increasing geopolitical tensions and uncertainty. Global defence expenditure reached US$2.46 trillion in 2024, or almost 2% of GDP, according to the International Institute for Strategic Studies, and has been steadily increasing since the pandemic.

Global defence spending chart

2024 marked the largest annual increase in defence expenditure since the end of the Cold War, and that record could be surpassed in 2025, with further increases anticipated by NATO countries. It's estimated 3.5% of global GDP could be spent on defence by 2030.

Staying defensive

Droneshield (ASX:DRO)

Defence stocks, ETFs, and precious metals such as silver and platinum are set to benefit from the shaky geopolitical outlook and increase in defence spending.

Analysts are overwhelmingly bullish on Droneshield, which is up almost 120% year-to-date. Multiple indicators show Droneshield is in a bullish trend, with the 5-day moving average (MA) above the 20 and 50-day moving averages. However, the average target price for the stock is $1.35, according to Refinitiv data, suggesting it's already 17% overpriced.

Droneshield historical trends and price targets

Shaw and Partners has a $1.20 price target and 'Buy' recommendation, while Josh Barker from RiverX told ausbiz after a period of volatility, it's starting to look more attractive as a longer-term play.

'It's really starting to get into that investment-grade space. And what I mean by that is the revenue's catching up to the market cap. There's been times where there's been a real mismatch there, particularly when the stock price has been quite high. It's also flicking over to being profitable, barring a little bit of spending on those growth plays. They could easily just adjust and be very cash profitable,' Barker said.

Droneshield daily chart

Austal (ASX:ASB)

Austal is an Australian-based global ship building company and defence prime contractor that specialises in the design, construction and support of defence and commercial vessels. 

Austal daily chart

CFIUS has the power to block the flow of overseas capital on the grounds of national security. Hanwha is seeking to increase its stake in Austal to 19.9% from its current 9.9%. The application to increase its equity stake still requires approval from Australia's Foreign Investment Review Board; however, the green light from CFIUS is expected to bolster Hanwha's case.

Austal historical trends and price targets

Electro Optic Systems (ASX:EOS)

Shares in Electro Optic Systems are up almost 100% over the past 12 months. Founded in 2022 and based in Canberra, Electro Optic Systems is a tech company focused on developing products and services for the global defence and space domains.

Electro Optic Systems daily chart

Electro Optic Systems recently secured a €35 million (AUD$61,876,500) contract to provide remote weapons systems scheduled for delivery this year and next. The buyer is believed to be a NATO member supporting Ukraine, with Ord Minnett viewing the contract as strategically significant.

The broker has a $1.80 price target and 'Buy' recommendation on EOS.

Marcus Today's Henry Jennings is staying defensive on the whole sector: 'Drones really have been a game changer on the battlefield. And, you know, you've got Droneshield, you've got Austal in the shipbuilding side of things. And of course then there's Electro Optic Systems. So there are 4 or 5 stocks in our market that have military capabilities.'

Electro Optic Systems buy/sell indicators and analyst projections

Defending portfolios with ETFs

In a world where uncertainty is the new normal, analysts say focusing on ETFs is a way to 'defend' your portfolio against the global situation worsening.

'In Australia some of the best ETFs have been the defence ETF. So there's been three that have been released over the last 12 months or so. And you know they've been performing very very well. The Global X Defence ETF is up about 46.5% over the last 12 months, so it's done exceptionally well. The VanEck Vectors Defence ETF 43% and BetaShares Global Defence & Cybersecurity ETF is up 34.9%. So yeah, that sector's done very, very well,' said David Lane from Ord Minnett.

DFND's European advantage

Mark Gardner from MPC Markets likes VanEck's DFND, which has a higher allocation to European-based defence companies.

'The DFND ETF is a really easy way to get an exposure to those because it's got the highest European exposure, because Trump's going to make the NATO nations pay at some stage one way or another. So what governments will end up doing is they're not going to pay the US. They'll just fund the domestic companies because the overall GDP spending has crept up to 2.5% of total GDP globally is now spent on defense, and it's expected to get to 3.5% by 2030. That 1% of total global GDP is an enorm

Silver's time to shine

Gold's rally as a hedge could now be limited due to stable supply chains and the fact it's already priced at a premium.

Silver monthly chart

Precious metals like silver and platinum are emerging as superior safe-haven bets, with silver prices touching 13-year highs of US$36 an ounce. The surge is silver's highest level since the aftermath of its run towards US$50 during its last bull market cycle in 2011-2012.

'The gold price is 100 times the silver price. So that is certainly unsustainable. And the breakout we see at the moment, I just see it as a rotation of hot money out of gold into the silver market. The silver market is much thinner, much smaller. And if we are to believe the statistics, we've run deficits in silver for about the last four years. And the projections are for about another four years of deficits. So silver can run its own race,' said Barry Dawes from Martin Place Securities.

'Look, it's been extraordinary. If you're looking at where it was in April and you know it's put on, it's been parabolic really. And the overall theme is certainly underinvestment across that whole sector for the last couple of decades. People are saying now is $40 achievable. And I think it will be in that third quarter,' said Peter McGuire from Trading.com.

There are few stocks to gain exposure to silver moves on the ASX; however, Sun Silver and Osmond Resources have both been rising recently.

Sun Silver is up 61% over the past year, while Jonathan Tacadena from MPC Markets says Osmond Resources' breakout over the past six months should continue in correlation with a surge in the spot price of silver.

Sun Silver daily chart