Asia's defense industry is witnessing a remarkable surge this year, with arms makers and naval shipbuilders leading the way. The global security order is darkening, and investors are betting on the region's companies to drive a rearmament boom. Let's explore the details.

Geopolitical Shifts and Defense Spending

Given the shifting geopolitical calculus and heightened risks of conflict, an isolationist US policy could propel countries toward more localised defense spending and the seeking of alternatives. This is opening doors for Asia's defense contractors, which offer faster delivery lead times and cost competitiveness. For example, Hanwha Aerospace in South Korea has seen its share price triple this year, reaching a market value of nearly 18trn won (close to $13bn). It has built up a $22bn book of orders, including exports of howitzers and rocket artillery to NATO countries stocking up after Russia's invasion of Ukraine. South Korea broke into the world's top 10 arms-exporting countries last year and aims to be fourth by 2027, creating opportunities for its defense industry.In Japan, Mitsubishi Heavy Industries, the biggest defense contractor, has gained more than 180% in Tokyo this year to a market value of 7.8trn yen ($50bn), while Kawasaki Heavy Industries, the second largest, is up 100%. IHI, a key supplier of jet engines and rocket systems, is up over 200% and is the third best performing stock on the Topix. Japan is set to increase defense spending to a record $59bn in the next fiscal year after abandoning a cap on military expenditure.

Beneficiaries of Quick and Cheap Rearmament

Asia's defense contractors are seen as particular beneficiaries of governments that need to rearm quickly and on the cheap, outside an increasingly uncertain US security umbrella. Hyundai Rotem, selling tanks to Poland, has risen about 140% versus a fall in the Kospi benchmark this year. These contractors are capitalizing on the demand for defense equipment and are experiencing significant growth.

Global Energy Shifts and Defense Orders

Japanese and Korean industrial firms and shipbuilders with defense arms also stand to benefit from shifts in global energy use. From LNG vessels to demand for electrical power equipment and turbines for grids, these companies are diversifying their portfolios and reaping the benefits. It's not just about defense but also about technological prowess and indigenous development.In India, state-owned Hindustan Aeronautics and Bharat Electronics have outperformed domestic stock benchmarks. Bharat Electronics has risen to become the Nifty index's third biggest gainer in 2024. In Singapore, ST Engineering, a maker of fighting vehicles and patrol vessels, is a top 10 performer.

Investor Divisions and Ethical Considerations

This year's defense share boom has divided investors. Many avoid the sector altogether for ethical reasons or see investments in particular firms as likely to fall afoul of geopolitical tensions. For instance, listed arms of China's state-owned defense giants have largely risen in line with mainland Chinese share prices this year, but there are concerns about certain companies. However, there has been a rebound in companies associated with China's "military-civil fusion" strategy of high-end dual-use technologies. Kuang-Chi Technologies, a Shenzhen-based developer of "metamaterials" with applications like stealth, has risen 150% this year in dollar terms.Overall, Asia's defense stocks are making significant waves in the global market, with various factors at play and opportunities for growth and development.