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Question asked 27/06/2026

Defence

Hi MM, I'll keep this brief as I'm short on time. The following MM comment stuck out to me today: "Recent years have witnessed the Russia-Ukraine War, the US-Iran War and overall increased defence spending by Europe and the US. However, we feel, and hope, these tailwinds are mature and the “hot sector” will cool in the coming year (s)". Can you elaborate why you feel this way, a little to my surprise, as opposed to viewing defence as an enduring theme, characterised by a multi-year build-out by a range of countries, including in the West, over the medium to long-term? Given a range of unfortunate events over the last half decade, surely a strong military/strong defence capabilities are viewed as increasingly critical, with many countries needing to substantially increase their defence capabilities, not a quick or mature process? Thanks, Darren

Answer

Hi Darren,

Our thoughts and comments came from two very different perspectives:

1 – We hope that the next chapter of global geopolitics doesn’t necessitate the huge, planned defence spending – MM finds it hard to imagine a worsening chapter than the last few years.

2 – Defence stocks are already priced for significant growth hence any concerns that these targets aren’t met could easily see a rerating on the downside.

The volatility we’ve seen across ASX defence stocks in 2026 demonstrates this perfectly although the below four are by definition all very different:

Electro Optic Systems (EOS) – a $2bn company forecast to make a profit in FY27, which has already corrected 30-50% on four occasions over the last year.
DroneShield (DRO) – a $2.2bn company that’s estimated to make $40mn in FY26 and has corrected 75% in late 2025.
Austal (ASB) – a $1.7bn company that’s estimated to make $65-70mn in FY26 and has corrected more than 55% in 2026.
Codan (CDA) – a $7.9bn (part defence) company that’s already corrected 25-30% twice in 2026.

Simply put, the huge defence spending planned by the likes of Europe are already largely built into the market leaving room for disappointment in our opinion, even though we do agree that aggregate defense spending is moving higher over time.

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Electro Optic Systems (EOS)

LAST UPDATED 25/06/2026 13:13

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