Published date: 17th July 2025 | Author: Tom Bailey
Over the past few decades, Asia has emerged as one of the most economically dynamic regions in the world, characterised by rapid economic growth, innovative new companies, and rising prosperity. But at the same time, Asia is increasingly troubled by growing geopolitical tensions and disputes.
A new term has emerged to describe the region: the Indo-Pacific. Defence policymakers in India, Japan, Australia, and the United States have embraced the Indo-Pacific as the most relevant framework through which to understand and respond to intensifying strategic competition with China.
Investors interested in the defence theme should also embrace this term.
The Asia-Pacific label no longer suffices because it obscures the broader geopolitical reality of the region, from Japan’s remilitarisation and Australia’s AUKUS commitments to India’s growing naval reach. Indo-Pacific signals a more contested and multipolar region – one in which middle powers are asserting agency in the face of China’s rise, new alliances are forming, and defence spending is surging.
Source: https://publications.parliament.uk/pa/cm5803/cmselect/cmdfence/183/report.html
Source: SIPRI; figures are USD$bns in constant 2023 prices and FX
In line with its tremendous economic growth, Beijing’s military budget has ballooned in recent years – from around $80 billion in 2005 to over $300 billion today. Even that is likely a conservative figure, according to numerous reports that China is undercounting the true extent of its military spending.[1] As its armed forces have modernised, so too has its assertiveness, provoking anxiety across a region already littered with unresolved territorial disputes.
Beijing’s claim to nearly the entire South China Sea – through the so-called Nine-Dash Line – puts it at odds with Vietnam, the Philippines, Malaysia, and Indonesia. Its ambitions regarding Taiwan remain the biggest flashpoint. While Washington is vocal in its support for Taipei, Japan also sees the island’s autonomy as a core part of its own security architecture. Meanwhile, India has ongoing border disputes with China along the Himalayas, where border tensions have periodically turned deadly. India is also increasingly uneasy about Beijing’s growing naval presence across the Indian Ocean, long seen as Delhi’s backyard.
The United States, too, is watching warily. China’s military transformation has triggered a strategic recalibration in Washington, underpinned by new and revived alliances: the Quad (U.S., India, Japan, Australia), AUKUS (Australia, U.K., U.S.), and the broader “Asia Pivot” strategy. America’s role as the preeminent Pacific power – established since the end of World War II – now depends on its ability to contain China’s power in the region.
Source: SIPRI; https://milex.sipri.org/sipri
Despite the regional risks, most Indo-Pacific powers continue to spend comparatively low amounts on defence when measured as a percent of GDP. The leader is South Korea, which allocates roughly 2.6% – a figure driven by the ever-present threat of Pyongyang rather than regional ambitions. India and Taiwan also spend slightly above 2% of GDP on defence.
Washington is increasingly unhappy with the defence spending commitments among its Indo-Pacific allies. Much like the transatlantic debate over European defence spending, the Indo-Pacific is witnessing its own burden-sharing row. As U.S. Defence Secretary Pete Hegseth put it recently:
“NATO members are pledging to spend 5% of their GDP on defence… it doesn’t make sense for countries in Europe to do that while key allies in Asia spend less on defence in the face of an even more formidable threat.”
Japan has been historically constrained by its pacifist constitution and a self-imposed 1% spending cap. This is changing. Japan has initiated one of its most significant military build-ups of the post-World War II era. Japan spent $55.3 billion on its military in 2024 – up 21% from the previous year and 49% more than in 2015. This was the biggest annual increase since 1952 and pushed military spending to 1.4% of GDP, the highest level since 1958. The rise is part of Japan’s 2022–2027 defence build-up, which prioritises long-range strike capabilities and air defence. Japan has committed to spending 2% of GDP on defence by 2027.[2]
Australia, in particular, is facing pressure. According to reports, the Trump administration urged Canberra to boost defence spending to 3.5% of GDP “as soon as possible.”[3] This demand came during a regional security summit where Hegseth met Australian Defence Minister Richard Marles, underlining just how central budget politics have become to alliance management.
Beyond headline budgets, the region is potentially undergoing a structural shift: from dependency on foreign arms to increased reliance on regional defence industries.
India is perhaps making the most concerted effort. One of the world’s biggest buyers of weapons, the government has introduced a policy that aims to directs 75% of its defence capital budget towards buying from domestic manufacturers.[4] Japan, meanwhile, is offering fiscal support to domestic producers as it ramps up its defence-industrial capacity.[5]
But beyond domestic manufacturing a second trend is emerging in the region: the use of arms exports as a tool of strategic influence. Countries with established defence sectors are positioning themselves as suppliers to the broader region. Japan has eased its postwar restrictions on weapons exports, such as the sale of radar systems to the Philippines, which it sees as key to promoting regional security.[6]
South Korea is also actively pursuing a strategy of boosting its arms exports. The country is committed to become a global leader in arms exports, with a target of capturing 5% of the market by 2027, up from 2.2% today.[7] In 2024, South Korea increased its arms exports by 4.9%.[8]
The Indo-Pacific rearmament trend is not just a geopolitical story- it’s an emerging investment thesis. Regional defence companies are already showing signs of strength. Since the start of 2025, Indo-Pacific defence companies, measured by the VettaFi Future of Defence Indo-Pac ex-China index, have returned 93.1%.
Source: VettaFi; 10/7/25. For illustrative purposes only.
Analysts’ expectations are also strong. As the table below shows, Ebitda growth is expected to be at almost 125% over the next three years, and sales growth at almost 87%. This is actually higher than growth forecasts for European defence stocks, with expected Ebitda growth over three years of just over 80%, and sales growth of almost 65%.
Most investors with defence exposure are likely to have relatively low exposure to Indo-Pacific defence companies. Most global defence indices (or the ETFs tracking them) have a low weighting towards Indo-Pacific defence firms, with countries such as India typically absent. Instead, investors gaining global defence exposure are likely to have much of their exposure to American and, increasingly, European defence firms. While the prospects of European defence remain compelling, it would be a mistake to overlook the Indo-Pacific. This is where the long-term drivers of defence demand may be among the strongest.
To explore the Indo-Pacific Defence Opportunity in more detail, click here.
[1] https://chinapower.csis.org/military-spending/
[2] https://www.rusi.org/explore-our-research/publications/commentary/japans-defence-budget-surge-new-security-paradigm
[3] https://www.9news.com.au/national/us-asks-australia-to-lift-defence-spending-by-billions/2fc1cef9-a256-41cb-b581-6c9b49f903e9
[4] https://www.sipri.org/sites/default/files/2025-04/2504_fs_milex_2024.pdf
[5] https://langleyesquire.com/japan-pursues-a-military-industrial-policy/
[6] https://www.mod.go.jp/en/article/2023/11/e005fad85ab5c48087162d939209232fb4cee216.html
[7] https://en.yna.co.kr/view/AEN20221124007300325
[8] https://www.sipri.org/sites/default/files/2025-03/fs_2503_at_2024_0.pdf
Source: https://publications.parliament.uk/pa/cm5803/cmselect/cmdfence/183/report.html. For illustrative purposes only.
Source: SIPRI; figures are USD$bns in constant 2023 prices and FX. For illustrative purposes only.
For illustrative purposes only
Source: SIPRI; https://milex.sipri.org/sipri.
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