Highlights:

• Hormuz and Red Sea risks are pushing maritime security higher on Australia’s agenda.
• Europe’s rearmament is intensifying demand for drones, missiles and sovereign defence manufacturing.
• Australia’s AU$425 billion capability pipeline could reshape domestic defence suppliers for years.

Global Flashpoints Raise Australia’s Security Stakes

Geopolitical pressure is building across several fronts. U.S.-Iran hostilities continue to disrupt traffic through the Strait of Hormuz, while renewed Saudi-Houthi fighting has threatened oil facilities and Red Sea routes. Russia’s war in Ukraine is also sustaining Europe’s push for stronger military readiness, while tensions in Gaza and the wider Israel-Palestine conflict remain unresolved. European policy is focused on readiness and deterrence rather than an announced offensive war against Russia. Together, these conflicts are reinforcing demand for drones, counter-drone systems, missiles, surveillance and secure maritime supply lines.

Australia Shifts from Spending to Capability

For Australia, the strategic response is already moving into procurement. The 2026 National Defence Strategy and Integrated Investment Program earmark around AU$425 billion over the decade for accelerated capability, including long-range strike, integrated air and missile defence, autonomous systems, counter-drone technology and naval expansion. Australia plans to increase defence expenditure to 3% of GDP by 2033. In September, the government separately committed AU$2.4 billion to strengthen air and missile defence.

Where ASX Defence Exposure Is Building?

• DroneShield Limited (ASX: DRO) said FY2026 committed revenue had climbed to AU$251 million by 8 September, placing it within its AU$250–AU$270 million full-year revenue outlook. The company also secured the first order for its new AI-enabled RfRecon system, with deployment to a Western European military customer expected by year-end.
• Electro Optic Systems Holdings Limited (ASX: EOS) reported AU$168.8 million of 1H26 revenue, up 283%, while its unconditional order book expanded 84% to approximately AU$846 million. EOS signed AU$303 million across 10 contracts during the half, highlighting accelerating demand for its counter-drone and defence technologies.
• Austal Limited (ASX: ASB) ended FY26 with a AU$16.5 billion order book, up 27%, while its Australasia backlog surged 670% to approximately AU$5.6 billion. Growth is supported by Australia's Strategic Shipbuilding Agreement and the commencement of the Landing Craft Medium and Landing Craft Heavy programs.

Outlook: Defence Demand Could Stay Structurally Higher

Persistent conflict does not guarantee uninterrupted earnings growth; procurement timing, export approvals, project execution and government budgets remain material risks. However, Australia is increasingly prioritising domestic capability, supply-chain resilience and technologies shaped by lessons from Ukraine and the Middle East. If geopolitical tensions remain elevated, defence investment could develop into a longer-duration Australian industrial theme rather than a temporary market reaction.

Note- All data presented is based on information available at the time of writing.

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