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Investment strategy
June 20, 2021

Defensive growth: How security requires cyber security

June 20, 2021
David Bailin
Chief Investment Officer and Global Head of Investments
Steven Wieting
Chief Investment Strategist and Chief Economist
Woman sat on bench on phone and laptop
SUMMARY

Recent high-profile data and cyber breaches confirm a crucial point - the growing and pressing need for cyber security in an increasingly digital industrial complex. We believe the public equity universe is rich in global opportunities to invest in the cyber security theme.

  • Recent media headlines drive home the importance of protecting the data and operations of every government, public company, and individual connected to the Internet. The SolarWinds malware attack, shortly followed by the ransomware that briefly shut down the Colonial Pipeline in the US, are just two high profile examples of data breaches that occur every day.
  • Outside the US, and especially in emerging and frontier markets, companies often operate in even less secure technology ecosystems, leaving their operations more vulnerable to attack. We therefore see an ongoing global opportunity to invest in companies that specialize in securing networks and the devices that connect to them.
  • As hackers become more sophisticated and brazen in their attempts to compromise private data, constant security upgrades and investment in the latest encryption schemes is likely to be a staple for corporate and government budgets, as long as, humans access an open Internet.
  • The public equity universe is rich in global opportunities to invest in the cyber security theme. While US-based specialists make up roughly two-thirds of the global cyber security market cap, we see a global universe of potential corporate customers that are likely to increase their investment in data security in the coming years.
  • Securing complex networks requires an expertise and state-of-the-art solutions that are both highly scalable and available off-the-shelf to a variety of different businesses. Cyber firms that specialize in cloud security are especially likely to benefit from significant growth in cloud-based computing. In addition, amid the rollout of 5G as more devices become connected to each other and the cloud, we view specialists in securing the Internet of Things (IoT) as other potential winners within the cyber space.
  • Cyber firms have delivered steady top and bottom line growth over the past five years, with that revenue only growing during the 2020 pandemic. Expectations are for that consistent growth to continue, with consensus penciling in 6% revenue growth this year and 7.7% next year.
  • We ultimately expect that all large corporations with significant client bases will have to face the reality that investment in the most cutting-edge cyber technologies is not a luxury expense but a critical business cost. Hence, growth in the cyber security space will be both robust and stable in the years and decades to come.
CIO Strategy Bulletin (PDF 1.17 MB)
OUTLOOK

Mid-Year Wealth Outlook 2023

While our asset allocation strategy remains defensive, investors should consider staying invested and modify portfolios over time.

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