Middle East situation repeatedly tug-of-war, Asian defense stocks welcome structural market.

The situation in the Middle East has repeatedly pushed up global arms demand, and Asian defense stocks are once again favored by funds. Institutions including Bank of America Securities believe that this market rally is not a short-term geopolitical trade, but a structural opportunity with long-term growth support. According to the Bloomberg Aerospace and Defense Index, three of the top five performing defense companies globally this year are from Asia, including South Korea's Hanwha Systems, LIG Defense & Aerospace, and Japan's AstroScale Holdings. Institutions such as Bank of America Securities and Jupiter Asset Management point out that the ongoing tension in the Middle East continues to highlight the need for defense, and the rise in the Asian defense sector may just be the beginning of long-term growth. Before the ceasefire agreement expires on Tuesday, the prospects for the Iran conflict remain uncertain, with significant differences in expectations for negotiations. US President Donald Trump said on Sunday that the US Navy fired at and seized a cargo ship flying the Iranian flag, marking the first major conflict in the Strait of Hormuz blockade in a week. Several European countries have planned to increase defense budgets, with defense expenditure a priority for Middle Eastern countries as well. Meanwhile, with cost advantages, supply chain resilience, and faster delivery capabilities, Asian defense exporters are expected to take on global orders. Wei Li, Chief Investment Strategist of BlackRock Global, said, "The conflict in the Middle East has accelerated the development of structural themes such as defense. Our investors buy defense stocks on dips during wartime selloffs because they know that the strategic value of defense continues to strengthen, and we remain bullish on its long-term value." Asian defense stocks rise after Iran war outbreak Expansion of defense budget supports high prosperity Defense stocks benefit from a surge in export demand, especially from Eastern Europe and the Middle East, as governments in these regions shift from passive defense to more proactive deterrence strategies. Sam Konrad, Investment Manager at Jupiter Asset Management in Singapore, pointed out, "There is still considerable room for the sector to rise, as defense expenditure as a percentage of GDP in many countries worldwide has not been high for decades. Even if the Iran war officially ends tomorrow, Middle Eastern countries will still plan to increase defense spending." NATO has set a target for member countries to increase defense spending to 5% of GDP by 2035, laying the foundation for high growth in regional defense spending. Bloomberg industry research data shows that European defense spending has increased by an average of about 10% per year in USD since 2021, driven by the reorganization of defense after the Ukraine conflict. Analysts say that Asian defense manufacturers benefit from the region's strong manufacturing base. TJ Thornton, Research Marketing Director at Bank of America Securities, said that these manufacturers have transformed from major weapon buyers to participants with research and development capabilities, continuous innovation, and integration into the US and European supply chains. Thornton said, "Many people see Asia as a region that buys defense systems. This has been the case for decades. But Asia is rapidly becoming a completely different region." Francis Tan, Chief Strategist for Asia at CA Indosuez Wealth Asset Management, believes that Korean companies stand out with high cost-effectiveness, advanced technology, and the world's fastest delivery speed. The restructuring of European defense, NATO equipment standardization, cost advantages, and backlogged orders together form a sustained prosperity outlook for years. Since the mid-2025, Indian defense stocks have lagged behind their regional peers, but they are gradually becoming a bright spot in the market. This is due to the Indian government's support for domestic production. The Indian defense industry index has risen by about 14% so far this year. ST Engineering Ltd., based in Singapore, is another company that has performed well, with its stock price rising by 13% since the war began. Unfazed by shortages and fluctuations, long-term funds are firmly positioning themselves During the Iran war, defense stocks experienced significant volatility, with some investors believing that the "conflict premium" has already been absorbed by the market. Since the outbreak of the war, the Bloomberg Aerospace and Defense Index has fallen by about 5.5%, mainly due to profit-taking and wavering expectations about the situation. However, some large investors have not been deterred. Gary Tan, fund manager at Allspring Global Investments, described the drop during the peak of the Iran conflict as "broad portfolio derisking" rather than a change in fundamentals. He said, "Even as the conflict eases, the market rebound shows that investors are strategically repurchasing defense sector risk exposure."