Introduction#
Asian defence stocks are entering a promising phase of growth, driven by increasing geopolitical tensions and a push for greater military self-sufficiency. According to analysts at OCBC, this trend is expected to elevate regional spending on defence, even as global defence shares have already seen significant gains.
Asia as a Defence Epicentre#
OCBC analysts predict that Asia is set to become a major hub for defence as governments ramp up procurement and local manufacturing efforts. The Bloomberg Asia Pacific Aerospace & Defence Index has increased by approximately 48% over the past five years. However, this growth lags behind the 106% rise in the Dow Jones U.S. Defence Index and the 243% increase in the MSCI Europe Aerospace & Defence Index, indicating potential for further growth in the Asian market.
Current Valuations#
The Asian defence index currently trades at 46.7 times its expected earnings over the next 12 months, which is slightly above its 10-year historical average of 44.2 times. In comparison, the MSCI ACWI Aerospace & Defence Index trades at 34.9 times, suggesting that Asian stocks may still have room for improvement in valuations.
Rising Defence Budgets#
OCBC highlights that defence spending in Asia is projected to rise by 5.7% in real terms, reaching $573 billion by 2025, as reported by the International Institute for Strategic Studies. Notable increases include a 7% boost in China’s defence budget for 2026, a 7.5% increase in South Korea’s spending to 65.9 trillion won, and Japan's aim for a record 9 trillion yen budget.
Broader Investment Opportunities#
The analysts also recommend considering investments in sectors related to drones, cybersecurity, and advanced materials, as modern warfare increasingly relies on technology beyond traditional weapons systems. This shift may present additional opportunities for growth in the defence sector.