Tell me about Australia: drones, raw materials and other promising investments

The Australian market has long been considered old-fashioned - but the numbers tell a different story. Over the past 20 years, the ASX 200 index has delivered an 8% annualized return - more than the risk-free rate of 4.2%. Now two strategic drivers have been added to traditional resources - critical minerals and defense, where Australia gets a political, geographic and investment head start.

The Australian Securities Exchange (ASX) is one of the most concentrated in the world, with the ten largest companies accounting for about 40% of capitalization. In terms of market size, the entire Australian exchange in October 2025 was about 25 times smaller than the combined value of companies in the S&P 500 index. In Oceania, the ASX remains the most liquid and deepest market.

The structure of the ASX differs from the US: 30% of the weighting is in the financial sector and 18.7% in commodities and mining companies. The IT sector remains small in terms of volume, but provides one of the highest growth rates: almost 20% per annum since 2005, which is comparable to the technology segment of the S&P 500 index.

About 82% of companies on the exchange have capitalization of less than 500 million Australian dollars. This explains the high saturation of the market with issuers of small and medium capitalization - mainly in the mining, technology and defense sectors

Australia is historically embedded in the Western system, but has also been actively engaged with China for the past 20 years: a military ally of the US, a commercial partner of China, and a key supplier of raw materials to both countries.

Technology and defense companies are gradually becoming an alternative to traditional dividend securities, changing the nature of the market from pure income to strategic.

Australia has become one of the main beneficiaries of the global confrontation between the US and China. The country ranks fourth in the world in terms of critical mineral reserves.

After China, which controls 59% of global production and 91% of processing of rare earth metals, restricted their exports in response to increased duties from the United States, Washington began looking for alternative sources of supply. On October 20, 2025, the U.S. and Australia signed an agreement to jointly finance the mining and processing of rare earth metals.

At the same time, Australia's military role is also growing. Against the backdrop of Russia's ongoing war against Ukraine and general militarization, the country's defense spending has increased to $63.5 billion in 2025, or 2.3 percent of GDP from 1.6 percent a decade ago. This is the fastest defense budget growth among Asia-Pacific countries.

Here are the companies that can benefit from the new global trends

Codan

Capitalization: 5.61 billion AUD

Codan's business consists of two key areas - tactical, including military communications equipment and metal detectors, which are also used for demining. Codan is not a pure representative of the defense industry, but it is an entry for cautious investors: risks are diversified at the expense of the civilian part of the business. In communications, for example, revenue from military contracts accounts for 38%, and the company is betting on its strengths with rising military spending globally. Australian investment media outlet Stockhead includes it in its picks for military stocks. According to MarketWatch, three of seven analysts recommend "buy" and four recommend "hold," with a target price implied up 12.12%. The stock has gained 91.74% since the start of 2025 through November 26.

Austal Limited

Capitalization 2.79 billion AUD

The company is an international shipbuilding and defense company with shipyards in Australia, the United States, the Philippines and Vietnam, as well as service centers around the world. The company has contracts with the U.S. and Australian navies. The stock is up 113.6% YTD through Nov. 26, with 2 of the 6 analysts tracking the stock recommending a "buy," three recommending a hold, and one recommending a sell. According to MarketWatch, the upside potential from the closing price on Nov. 26 is 62%.

DroneShield Limited

Capitalization: 1.97 billion AUD

The company was created to kill mosquitoes in the bedroom with a laser, the Financial Times wrote. The idea of "hitting sparrows with a cannon" did not impress the market. The owners reoriented the drones for military use. The company supplies drone defense platforms, including those using AI, to 40 countries. They are used in particular to fight the Hussites in the Red Sea and for the needs of the Ukrainian army to fight the Russian Federation. The stock has gained 183.7% YTD through Nov. 26. According to Tipranks, the growth potential is still about 100%.

Electro Optic Systems

Capitalization: 889.5 million AUD

Electro Optic Systems is also engaged in the development of technologies to combat drones. Its system was used in Ukraine. The company recently reported a €11.4 million order from a European NATO country for a laser-based anti-drone system. The total contract value is around A$400 million. Three out of four analysts on Tipranks give the stock a Strong Buy rating, with a potential upside of 117%. The stock has gained 255.98% YTD through November 26.

Elsight

Capitalization: 378.68 million AUD

The company provides communications for unmanned systems on the battlefield and beyond line-of-sight. Its Halo AI product for controlling drones and combat robots is able to work even in conditions of electronic countermeasures, as it combines cellular, radio frequency and satellite connections into one secure channel. On November 18, the Pentagon's innovation office selected this small cap company for the third phase of its competition. Elsight has been awarded more than $14.7 million (AU$22.8 million) in contracts in 2025 alone. That's a 600% increase on 2024 revenues. The company has over 100 customers, thousands of devices in service and a partnership with Lockheed Martin, the company aims to make Halo the communications standard in unmanned military vehicles. Since the beginning of the year, the stock is up 366% in value. The upside potential from the closing price on Nov. 26 is 15.6%.

Lynas Rare Earths

Capitalization: 15.98 billion AUD

Lynas remains the largest and most sustainable rare earth mining and processing company outside of China. Its operations are based on the Mount Weld mine in Western Australia, one of the richest deposits of rare earth metals in the world. The company controls the entire cycle from mining to oxide refining, which reduces dependence on external contractors and makes the business more sustainable. The main risk is large capital expenditures, which can worsen financial performance. The stock has added 133% in value since the beginning of the year. According to MarketWatch: 7 analysts recommend buying the stock, 5 recommend holding and 4 recommend selling. The average target price is $15.78, with a potential upside of about 60%.

Iluka Resources

Capitalization: 1.66 billion AUD

Iluka Resources is one of the oldest producers of rare earth metals. The key area of focus is the construction of a fully integrated rare earth metals processing facility at the Eneabba deposit. Construction is scheduled to start in the second half of 2025, with production start-up in 2027. The consensus estimate of Ourperform analysts, the stock has a potential upside of 11.2%. Since the beginning of the year, the stock has grown by 31.68%.

Northern Minerals

Capitalization: 334.19 million AUD

Northern Minerals is a mining and exploration company with a key asset, the Browns Range project, focused on mining heavy rare earth elements critical to high performance magnets. Northern Minerals raised A$60.5 million through a share placement in late October 2025. Since the beginning of the year, the shares are up 66.7%. This is a fairly high-risk investment. Three independent valuers at Simply Wall St Community estimate the fair value of Northern Minerals at between AUD 0.009 and AUD 0.04 per share, this implies either a 233% drop or a 70% rise from the closing price on November 26.

This article was AI-translated and verified by a human editor