Smart Security: How to Hedge Geopolitical Tensions

In recent years, investors have had to deal with a rapidly changing geopolitical backdrop as elections, trade wars, and military conflicts have triggered large swings in asset markets. Moving forward, geopolitics will likely remain a defining pillar over this next decade and continue to present challenges to investors. On the other hand, there are also areas of the market that could benefit as governments, corporations and households fortify their digital and cybersecurity to protect themselves in an increasingly fragmented world.

We call this “Smart Security” and here, we detail its drivers and outlook.
Cybersecurity is an enabling technology for the “digital transformation” of the economy. Many of the exciting high-conviction growth areas we already emphasize to clients (5G, Cloud computer, internet of things, AI, etc.) are only possible if companies are able to protect their networks and keep client data confidential. Data losses could undermine the trust people have in the technology they use. We believe cybersecurity technology is a must-have in the digital age and will therefore benefit as the digital, connected world expands.

Pandemic-induced vulnerabilities: The shift to remote working due to the pandemic increased the “attack surface,” as hackers shifted to target organizations through the weaknesses of employee home-computing set-ups. This caused individuals to purchase new cyber protection software, but also caused businesses to change their cyber-setup to protect cloud-based infrastructure required for remote working.

Cyber is now an essential part of war, with every major country investing heavily not just to defend their own systems and societies, but also to play offense and be able to inhibit the military and domestic infrastructure capabilities of their rivals. Therefore, it seems clear there are catalysts to a multi-year enforced upgrade cycle across the global private sector, and throughout public sector institutions as well.

Cybersecurity is investable. There are some other aspects to investing in cyber which may attract investors, including possible appreciation during times of cyber conflict and an active cycle of merger and acquisition activity. These factors have been gradually recognized by the market and have helped to drive out-performance of cyber stocks over the broad market in recent quarters.

In summary, investments in cybersecurity are simultaneously a play on the digital transformation megatrend and a beneficiary of the rising geopolitical tensions in today’s world.

Rick Barragan is the Managing Director, Los Angeles Market Manager, for J.P. Morgan Private Bank.
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