In recent years, elections, trade wars and military conflicts have caused significant volatility in asset markets, forcing investors to combat a rapidly changing geopolitical landscape.
Unstable geopolitical environments are likely to be the decisive pillars of the 2020s and can have a significant impact on investment.
While such an environment presents numerous challenges, there are also sectors of the market that can benefit, as governments, businesses and families seek to protect themselves in an increasingly fragmented world. Key areas of security that may benefit from this environment include computer system integrity, defence and border security systems.
Collectively, these areas are referred to as “smart security”, and the drivers and investment prospects for each of these three pillars are as follows.
Boom times for cybersecurity
Cybersecurity is essential to the smooth “digital transformation” of the economy. Many of the exciting high-confidence development sectors, such as 5G, cloud computing, internet of things and artificial intelligence, are only achievable if organisations can secure their networks and maintain the confidentiality of client data. Data breaches may erode people’s faith in the technology they utilise. Consequently, cybersecurity technology, like semiconductors, is a necessity in our digital age and will benefit as the digitally connected world evolves.
The move to remote working due to the pandemic widened the “attack surface,” as hackers shifted their focus to exploiting the vulnerabilities in employee home-computing setups. This has prompted consumers to acquire new cybersecurity software and organisations to modify their cyber-setup, in order to protect cloud-based infrastructure that is essential for remote working.
Moreover, with global crises on the rise, so is the need for cybersecurity. Countries are now investing extensively in cyber security not only to defend their own systems and society, but also to play offensive and be able to impede their adversaries’ military and domestic infrastructure capabilities. Countries in the Middle East regularly come up with new measures to curb cybercrime.
In November 2021, the UAE Central Bank established a new Networking and Cyber Security Operations Centre to help defend the financial system’s IT infrastructure against cyberattacks. In addition, the Saudi Central Bank (formerly Saudi Arabian Monetary Authority) has issued a cybersecurity framework to enhance the cybersecurity posture of financial institutions.
It appears that there are catalysts for a multi-year forced upgrade cycle in the global commercial sector, as well as in public sector organisations. Due to high profile hacks, cybersecurity was already at the top of corporate expenditure priorities in surveys conducted before the Ukraine crisis.
Importantly, cybersecurity is investable
In addition to the above growth factors, there are numerous aspects to investing in cybersecurity that may appeal to investors, including potential appreciation during periods of cyber conflict and an active merger and acquisition cycle. These considerations have steadily gained traction in the market, resulting in cyber equities outperforming the wider market in recent quarters. Therefore, investments in cybersecurity will go hand in hand with the digital transformation mega-trend and is a beneficiary of the escalating geopolitical tensions in today’s world.
Defence spending is back and here to stay
Following the conclusion of the Cold War, the world experienced a “peace dividend,” in which military spending as a percentage of budgets and GDP decreased. This allowed resources to be redirected to schools, hospitals and tax cuts, which contributed to the boom in the West in the 1990s. We are currently witnessing a global reversal of this trend.
When it comes to investing in defence firms, we find that they have the “defensive” traits of being unaffected by the economic cycle, typically providing inflation protection, have a strong cash-flow position
and dividend history and a reasonable valuation starting point.
The third sub-component: Smart borders
In Western democracies, immigration is perhaps the most potent political issue. Fears about the nation state disintegrating in a more globalised world have been major wedge issues for recent market-shaping political movements. It appears that governments will continue to place a premium on securing borders against those who do not have legal status or who are infected with a virus.
Furthermore, immigration flows are now obviously part of the “hybrid-war” strategy, with agitators attempting to put pressure on Western democracies by bringing migrants to their borders. Also, if society fails to adjust to climate change, one may argue that border security is a longterm hedge. According to current forecasts, global warming will cause tens of millions of people to migrate to the northern developed countries.
In conclusion, in an increasingly digital and connected world, cybersecurity should be at the top of the agenda for businesses. Organisations must also keep raising the bar and ensuring that they are investing in both the technology and the knowledge required to comprehend the nature of the challenges they will encounter.