Remember when defence investing meant buying a couple of big American primes or the odd European giant and then forgetting about them for a decade? Those days feel almost quaint now.
While most retail investors have spent the last two years chasing every European name with “defence” in its company description, something far larger – and in my view far more durable – has been quietly building thousands of miles to the east. The Indo-Pacific region is in the early stages of what historians will probably look back on as the biggest sustained military build-up since the Cold War. And unlike Europe’s surge, which still faces political and budgetary headwinds, this one looks locked in for decades.
Today I want to show you why the smart money is starting to rotate out of crowded European names and into a handful of lesser-known Australian-listed companies that sit right at the heart of this transformation.
Why the Indo-Pacific Shift Changes Everything
Let’s start with the numbers, because they’re frankly jaw-dropping.
Japan has committed to doubling defence spending to 2% of GDP by 2027 – that’s the largest increase since 1945. South Korea is already spending close to 3% and wants more. Taiwan is pushing towards 3%. India is modernising at speed. And then there’s Australia, rapidly turning itself into the southern anchor of America’s entire Indo-Pacific strategy.
When you add it all up, the region (excluding China) is on track to increase military budgets by well over $200 billion in the coming decade. That’s real, multi-year, bipartisan money flowing into ships, submarines, bases, drones, and counter-drone systems. And crucially, a huge chunk of it is being spent locally rather than automatically defaulting to the traditional U.S. or European suppliers.
That last point is what makes the opportunity so exciting for investors.
The Three Australian Names I’m Watching Closest
Australia isn’t just a buyer in this new world – it’s becoming a serious exporter and technology hub in its own right. Here are the three businesses that, in my opinion, offer the cleanest exposure to the theme.
1. Austal – The Agile Shipbuilder Everyone Needs
If you’ve ever looked at a map of the Pacific, you’ll immediately understand why heavy, deep-water frigates and destroyers aren’t always the answer. Vast distances, contested island chains, and shallow littoral waters dominate the region. The vessels that matter most here are fast, relatively light, and highly manoeuvrable.
Enter Austal Limited (ASB.AX).
Austal specialises in aluminium-hulled patrol boats, littoral combat ships, and high-speed support vessels – exactly the kind of craft that regional navies are snapping up. The company just delivered its ninth Evolved Cape-class patrol boat to the Royal Australian Navy and has a growing order book from Pacific Island nations under Australia’s security assistance programme.
But the real kicker? Austal is one of the very few non-U.S. builders trusted to work on America’s Littoral Combat Ship programme. That gives it a footprint inside the world’s largest defence budget while still enjoying strong domestic and regional growth.
Financially, the company is firing on all cylinders. Revenue for the year to June 2025 jumped 24%, while EBIT doubled. The order backlog is at record levels, and management talks openly about “multi-decade visibility”. In a sector where contracts routinely span 10-15 years, that kind of language gets my attention.
“We are seeing sustained demand for the type of vessels that are ideally suited to Indo-Pacific operations – lighter, faster, and more deployable than traditional blue-water warships.”
Austal management commentary, 2025
Valuation-wise, the stock still trades on a forward P/E below the broader defence sector average. That feels like a bargain to me.
2. Ventia – The Unsung Infrastructure Backbone
Every extra dollar spent on shiny new hardware needs several more dollars spent on bases, training areas, fuel depots, and maintenance facilities. This is the boring – but extremely profitable – side of defence spending.
Ventia Services Group (VNT.AX) is Australia’s largest provider of base support and estate management services to the Australian Defence Force. Think everything from catering and cleaning to running entire training ranges and maintaining airfields in the country’s remote north.
Why does this matter now? Because Australia is in the middle of a once-in-a-generation build-out of its northern bases to support deeper U.S. Marine and Air Force rotation, plus its own growing submarine and long-range strike capabilities. Ventia is the company actually making that happen on the ground.
In September 2025 the Department of Defence handed Ventia two massive Base Services contracts worth A$2.7 billion combined. These run for up to 13 years with extension options. That’s the kind of long-dated, government-backed cash flow that income investors dream about.
First-half 2025 net profit rose almost 12%, with EPS growing 16.5%. The dividend yield sits comfortably above 4% and is growing steadily. For anyone wanting defensive growth (small “d”), Ventia is hard to beat.
3. DroneShield – The Counter-Drone Pure Play
If the war in Ukraine has taught the world one lesson, it’s that cheap drones can neutralize billion-dollar platforms. The second lesson? Every military now desperately needs counter-drone technology.
DroneShield Limited (DRO.AX) is one of the very few pure-play listed companies in this space globally. It builds handheld, vehicle-mounted, and fixed-site systems that detect, track, and neutralise hostile drones using radio-frequency, radar, and AI.
The growth numbers are simply staggering. First-half 2025 revenue came in at A$62.3 million – a 210% increase year-on-year. More importantly, the company swung to its first-ever net profit. Cash receipts doubled, the balance sheet is clean, and the customer list now stretches from the U.S. Department of Defense to European NATO members and multiple Indo-Pacific allies.
Perhaps the most interesting aspect is geographic diversification. While Australia remains important, Europe already accounts for 36% of sales and Asia ex-China another 29%. That tells you the technology works and is in demand everywhere.
Yes, the share price has had a wild ride – welcome to small-cap defence – but the underlying operational momentum feels extremely strong. If counter-drone spending follows the same trajectory as drone spending itself, we’re still in the very early innings.
Risks? Of Course – But They’re Different This Time
No investment is risk-free, and defence stocks come with their own special cocktail of worries.
- Geopolitical détente could slow spending (though frankly I think that risk is overstated in the current environment)
- Contract delays and cost overruns are part of life
- Currency moves (these are AUD-listed stocks)
- Valuation expansion has already been sharp in places
Yet the structural drivers – binding treaty obligations, bipartisan political support, and the simple reality of geography – feel much more durable than the post-Ukraine spike we saw in Europe.
How to Get Exposure Without Losing Sleep
If picking individual small-to-mid cap names feels too spicy, there are now specialist ETFs appearing that focus explicitly on the “Future of Defence” in the Indo-Pacific ex-China space. They tend to hold all three names above plus a basket of others, providing instant diversification.
Alternatively, many global defence funds have been steadily increasing their allocation to the region over the last 18 months. Sometimes the easiest way is to let the professionals do the heavy lifting.
Either way, I’m convinced the Indo-Pacific defence theme is moving from “interesting sideshow” to core portfolio holding for anyone thinking in decades rather than quarters.
The European rearmament story has been good to early movers. The next leg, in my view, belongs to the other side of the world.
Happy investing – and stay diversified.
