'Geopolitical risk is unlikely to subside': Should you pile into ASX defence shares right now?

With gains of up to 740% in a year, can ASX defence shares keep charging higher?

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Top ASX defence shares have delivered some absolutely eye-watering gains over the past year.

What kinds of gains are we talking about?

Well, over the past 12 months, the All Ordinaries Index (ASX: XAO) has gained a healthy 8%.

Now, here's how these leading ASX defence shares have performed over that same period:

  • Electro Optic Systems Holdings Ltd (ASX: EOS) shares are up 99%
  • Codan Ltd (ASX: CDA) shares are up 54%
  • AML3D Ltd (ASX: AL3) shares are up 280%
  • Droneshield Ltd (ASX: DRO) shares are up 704%

Now those are the kinds of returns you want to see in your portfolio!

What do these companies do?

You may be familiar with these ASX defence shares already.

If not, here's a quick snapshot of what they do.

Electro Optic Systems has two business divisions: Defence Systems and Space Systems. The company's products include remote weapon systems and counter-drone technology. Electro Optic Systems recently inked a defence contract with a Western European nation.

Codan develops rugged electronics solutions for government, corporate, and consumer markets worldwide and has contracts with both the military and law enforcement. Among the favourable market fundamentals that the ASX defence share cited in its half-year reports was "increasing global military and defence spend in the Five Eyes Intelligence community."

AML3D designs and constructs 3D parts using metal additive manufacturing technology. The company recently signed new contracts with the United States Navy.

And Droneshield provides drone detection and disruption solutions to the defence sectors, commercial airports, prisons, and other critical infrastructure. Droneshield has multiple government defence contracts, including with the US.

Can ASX defence shares keep on delivering?

The conundrum with investing in ASX defence shares is that they tend to perform much better during times of high or rising global tensions.

While we ardently hope for world peace to break out, an event that would likely see ASX defence shares sold down, that's unfortunately not the most likely scenario.

Indeed, in addressing the mid-2024 outlook, Ronald Temple, chief market strategist at Lazard, says bluntly, "Geopolitical risk is unlikely to subside."

According to Temple:

The war in Ukraine looks nowhere near resolution and … a Trump presidency may inject even more volatility into the geopolitical landscape given uncertainty over his support for European and Asian allies and his plan to broadly raise US tariffs.

Then there's the potential powder keg in the Middle East as Israel's battle against Hamas drags on.

Temple notes that, "The risk of expansion of the current hostilities to include an expanded confrontation with Hezbollah has increased meaningfully."

But the most worrisome conflict the world faces is a potential shooting war between the US and China.

Temple says:

The most consequential geopolitical risk is a confrontation between China and the United States. Ongoing skirmishes in the South China Sea between China and the Philippines appear to be the most likely source of potential near-term conflict.

We fervently hope wiser, calmer heads will prevail and step away from the brink.

Until then, these top ASX defence shares could well continue to deliver market-beating returns.

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended DroneShield and Electro Optic Systems. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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