Bulletproof investing: Ride the security supercycle in these defence stocks

If you've been watching the headlines lately, it's hard to ignore the drumbeat of global instability—from escalating U.S.-China tensions to the grinding conflict in Ukraine and proxy flare-ups in the Middle East. Markets often react in an emotive, simplistic, and binary way, swinging from euphoria to fear. But here's the contrarian angle: amid this chaos, defence stocks aren't just surviving; they're thriving. At MPC Markets, we see this as the dawn of a "Security Supercycle," where persistent geopolitical risks and soaring military budgets create enhanced growth opportunities for savvy investors. With global military spending surging to a record $2.7 trillion in 2024—up 9.4% year-on-year—and forecast to hit $3.4 trillion by 2030, this isn't a fleeting trend. It's a structural shift, and we're positioning accordingly.

In this piece, we'll unpack the key drivers behind this Supercycle, drawing from our recent Geopolitical Investment Strategy report. We'll explore how NATO's ambitious new spending targets and technological arms races are fuelling demand, backed by hard data and real-world catalysts. Then, we'll share how we're playing it—with five top picks spanning global giants and ASX innovators. As always, we balance the optimism with a nod to the risks, but the upside here is compelling in an increasingly uncertain world.

The Geopolitical Backdrop: A World on Edge

Let's start with the macro picture. The Global Guardian's 2025 Geostrategic Stress Index paints a stark reality: polycrises are brewing in hotspots like Russia, China, and the Middle East, where local conflicts risk spilling into regional or global dimensions. Trade protectionism is ramping up, with U.S. tariffs on China threatening supply chains, while technology decoupling accelerates in semiconductors and AI. Add in commodity vulnerabilities—most platinum and silver production hails from geopolitically shaky nations—and it's clear why governments are fortifying defences.

Europe's fragmentation exacerbates this. High energy prices, migration challenges, and populist movements strain unity, but the Russia-Ukraine war has jolted priorities. NATO allies, under U.S. pressure, have committed to a game-changing 5% of GDP on core defence by 2035—more than double the longstanding 2% target. All members are now on track to meet 2% this year, with collective spending projected at $1.6 trillion in 2025. Poland leads at 4.1% of GDP, followed by Estonia and the U.S. at 3.4%. This isn't just rhetoric; it's translating into rapid rearmament and procurement booms.

In the Asia-Pacific, China's military build-up sparks regional arms races. Japan, India, and Taiwan are accelerating modernization, creating a cycle of competitive investment. Meanwhile, modern warfare's tech tilt—AI, drones, hypersonics, and cybersecurity—demands hefty R&D. Nations are channelling funds into resilient supply chains, from rare earths to undersea cables, ensuring economic security amid vulnerabilities.

The numbers tell the story: Global defence budgets are up 8.1% in 2024, with the U.S. alone at $962 billion in 2025—four times China's $246 billion. Excuse the pun, but this is rocket fuel for contractors with strong international sales and cutting-edge tech. At MPC Markets, we view defence as a hedge against volatility—offering stability when broader markets wobble.

Key Catalysts Driving the Supercycle

Several trends are converging to supercharge defence spending:

• Heightened Tensions: The Ukraine conflict has spurred Europe's rapid rearmament, while Middle East instability reinforces capabilities. U.S.-China rivalry shapes long-term competition, with proxy wars adding urgency.
• NATO and Policy Shifts: Washington's push for allies to pull their weight could intensify. European members are eyeing 2.5-5% GDP pledges, boosting demand for advanced equipment and deterrence.
• Tech Advancements: Emerging tech like drones and missile systems is non-negotiable. Investments in AI and space assets prevent strategic gaps, with high costs ensuring sustained budgets.
• Regional Arms Races: Asia-Pacific spending surges, led by China's build-up. This cycle reinforces patterns, with supply chain security now a strategic necessity.
• Economic Security: Protecting infrastructure—from energy grids to manufacturing—extends defence planning, funnelling funds into resilience.

These catalysts overlap with NATO de-funding scenarios, favouring diversified contractors. As our report notes, firms like RTX and BAE are prime beneficiaries, with global reach and tech leadership.

How We're Playing It: Our Top Defence Picks

At MPC Markets, we're picky about where we put our money—Here are our four favourites: a couple of big international and ASX listed gems focused on cutting-edge anti-drone and unmanned tech. We've leaned toward ASX stocks to suit our local readers, but all of them have a worldwide reach.

RTX Corporation NASDAQ: RTX : This U.S. giant makes missiles, radars, and aircraft engines—stuff that's in high demand as countries beef up their defences. Lately, they've landed some big deals, like a $205 million contract with the U.S. Navy for Phalanx weapon systems (September 8), $646 million for advanced SPY-6 radars (June 9), and a whopping $1.1 billion for AIM-9X missiles (June 4). With the U.S. pumping $962 billion into defence this year, RTX is perfectly placed to ride the wave of tech upgrades and arms build-ups. We think it could climb 40-60% over the next couple of years as more contracts roll in. On the flip side, supply chain snags could slow things down, but their track record of paying dividends for 55 years straight gives it a rock-solid feel.

BAE Systems (LSE:BA) : BAE is a UK powerhouse in jets, submarines, and electronic warfare gear. In the first half of 2025, their sales jumped 10%, and they're guiding for even more growth ahead. Fresh highlights include delivering their 1,000th THAAD missile seeker, a new quantum sensing project with the U.S. Air Force Research Lab (September 12), teaming up with Lockheed Martin on drone tech (September 9), and a $1.7 billion deal for APKWS laser-guided rockets (September 1). As NATO countries ramp up spending, BAE's strong ties in Europe and beyond make it a natural winner. Analysts see at least 15% upside short-term, but rising global tensions could push it to 40-60% gains in two years. Keep an eye on cost pressures that might squeeze profits, though—their 21-year dividend history and competitive edge help balance that out.

DroneShield ASX: DRO : DroneShield specializes in tech that detects and stops unwanted drones, tapping into a huge and growing market for counter-drone systems. A big milestone: They've now sold over 4,000 units worldwide, boosted by $7.9 million in recent orders from the U.S. Department of Defense (September 16). They're also expanding R&D in Virginia, doubling their team there (September 22), and just got added to the S&P/ASX 200 index for more investor attention. With drone threats popping up in conflicts like Ukraine, this fits right into the supercycle—sales are growing fast, and we see 50-80% potential upside as more governments and militaries snap up their gear. Watch for new contract announcements to keep the momentum going.

Electro Optic Systems ASX: EOS EOS builds high-tech lasers, remote weapons, and surveillance systems for defence and space. Their market for electro-optical gear is massive and expanding steadily. Recently, they unveiled the Apollo high-energy laser weapon (September 8), which can scale up to 150 kW and take out threats cheaply, building on a €71.4 million deal with a NATO country. It was showcased at the DSEI expo in the UK (September 17), plus they've partnered with MSI-Defence and have a $307 million order backlog as of August 22. As nations focus on affordable ways to counter drones and missiles, EOS is in a sweet spot—sales are picking up 25-30% yearly, and we reckon it could rise 40-70% over time. The real edge? Their lasers cost pennies per shot compared to traditional missiles. Cash flow is improving too, with $20 million on hand.

Due to AI stealing all the headlines, this thematic isn’t receiving the hype it deserves because the Security Supercycle is here to stay, While policy shifts or supply disruptions pose downsides, the sector's defensive nature—sustained budgets, tech moats—makes it a rare mix of growth and defence