The geopolitical situation is turbulent, and defense spending in various countries remains high, driving global defense stocks to outperform the market. Asia is expected to become the focus of the next round of defense spending and industry growth, with regional defense stocks likely still in the early stages of an upward cycle.
A recent report from OCBC Bank indicates that since the Russia-Ukraine war, geopolitical risks have continued to expand. Even though the current Middle East conflict has eased, the global order is becoming fragmented, and countries will continue to increase defense spending for security needs, supporting the growth of orders for defense companies and enhancing industry profitability.
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However, analysis also points out that the future 12-month price-to-earnings ratio of the MSCI All Country Aerospace and Defense Index is approximately 34.9 times, which is about 1.3 standard deviations higher than the 10-year average of 25.2 times, indicating that market expectations are high. If performance does not meet expectations, stock prices may quickly decline.
<h3>Asia May Become the Next Global Defense Industry Focus</h3>
According to data from the International Institute for Strategic Studies (IISS), defense spending in Asia is expected to grow by 5.7% in 2025, reaching USD 573 billion (SGD 733 billion), an increase higher than the 5.5% in 2024.
The report also mentions that the U.S. 2026 Defense Strategy Report emphasizes that allies should take primary responsibility for their own defense, which will prompt Asian countries to accelerate the enhancement of their domestic defense capabilities; coupled with the increasing emphasis on localizing defense procurement, Asian contractors will benefit.
<h4>Further Reading</h4>
Middle East conflict boosts defense stocks; analysts say valuations are no longer cheap and caution is advised for entry

 [Rising military spending benefits defense concept stocks; analysts suggest focusing on three local listed companies 
 
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It is worth noting that Asia is transforming from a major arms-importing region into a key supplier. &#34;These Asian companies are filling the supply gap caused by insufficient production capacity in Western countries with cost-effective solutions.&#34;
From the perspective of stock performance, while Asian defense stocks have risen, they still lag behind their European and American counterparts. Over the past five years, the Bloomberg Asia-Pacific Aerospace and Defense Index has a price return of about 48%, which is less than half of the Dow Jones U.S. Defense Index (106%) and only one-fifth of the MSCI Europe Aerospace and Defense Index (243%).
Meanwhile, the price-to-earnings ratio of this Asia-Pacific index for the next 12 months is 46.7 times. Although this absolute value is higher than the global index's 34.9 times, it is only slightly above its own 10-year historical average of 44.2 times. Therefore, compared to European and American defense contractors, the current valuation entry point and risk-return situation of Asian defense stocks may be more attractive.
The report suggests that investors pay attention to emerging growth areas at the intersection of artificial intelligence (AI) and defense, such as drones and unmanned systems, cybersecurity attacks, and sectors that indirectly benefit from the global arms surge, including basic metals and materials, telecommunications, finance, and logistics real estate

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According to the latest report from OCBC Bank, the turbulent geopolitical situation and high defense spending in various countries have driven global defense stocks to outperform the market. Asia is expected to become the focus of the next round of defense spending and industry growth, with regional defense stocks still in the early stages of an upward cycle. However, the current price-to-earnings ratio of the MSCI Global Aerospace and Defense Index is above the historical average, and market expectations are high. If performance does not meet expectations, stock prices may quickly decline

Zaobao

Penghua CSI Defense ETF

Hwabao WP CSI Military Industry ETF

Huatai-PB CSI All Share Aviation & Aerospace ETF

ChinaAMC CNI Aerospace ETF

Tianhong CNI Aerospace ETF

Penghua CSI Aerospace Defense Index Fund(LOF)-A

LIHANG TECHNOLOGY

Guotai CSI Military Industry ETF

Report: Asian defense stocks are still in the early stages of an upward cycle; defense stocks have outperformed the market in the past five years | Lianhe Zaobao