“Living without security is the riskiest choice you can make”
The world is changing. The world is changing, and so are the risks. If a few decades ago gangsters were breaking into safes, today they are cybercriminals. Multinationals, hospitals, SMEs, private individuals, public authorities – nobody seems to be immune to data theft, ransomware, viruses, hacking and so on. The need for security is even in the details, since it is now possible, with technology, to influence elections or even recently to hack beepers.
There sector on the stock market that is growing all the time and still has so much potential. It’s all about safety. Over the long term, adding security-related stocks to your portfolio is an excellent idea, with specialist companies enjoying phenomenal growth. And it’s probably not over yet. The sector is thriving. Few analysts would dare challenge this.
The performance of the Pictet-Security I-USD strategy, one of the most popular in this sector, bears this out. In almost 18 years, an investor has been able to quadruple his initial investment. Since 31 October 2006, when the fund was launched, annualised performance has exceeded 8.5%, despite the ‘annus horribilis’ years of 2008 (-35%) and 2022 (-33%). The sector has not escaped the winds of correction, but is rebounding strongly (+41% in 2009 and +22% in 2023). There are many arguments in favour of the sector.
“Albert Einstein said: “People and safety must be the primary concern of any technological venture. In 2021, Jerome Powell even surprised us by saying that cybercrime was the main risk to the economy. Let’s face it, without security, life would be impossible and progress would be inappropriate.
At every moment, in every place, from morning to evening and from evening to morning, security is present, discreet. The unfortunate opening of an attachment or a simple click on a malicious link received in an e-mail can turn into a catastrophe, a computer attack. The hackers behind these attacks are sometimes looking for something other than money, such as data, in the hunt for confidential information.
The figures are exploding
One percent of global GDP! That’s how much computer viruses and data theft cost the economy over the course of a year, according to a study by cybersecurity software company McAfee and the Centre for Strategic and International Studies (CSIS). According to a more recent study by Market Insight, the bill continues to rise. All in all, cybercrime, with its increasingly organised networks, has left behind a bill in excess of 8,000 billion dollars, set to rise by 15% in 2023 (compared with 600 billion in 2018). The cost and frequency of data breaches are at an all-time high: the start of a new era in cyber security. Nothing to be optimistic about for the future
Indeed, it is not just inflation that has risen, but also the average worldwide cost of a data breach. According to this year’s IBM Cost of a Data Breach Report, it has reached a record level of $4.88m, up 9% on 2023. Data breach costs are at their highest since the pandemic. Lack of safety is expensive. A hack takes place every 39 seconds and 3.8 million documents are stolen every day. The increasing digitalisation of society has opened the way to a host of new cyber security risks. This is attracting a great deal of interest from investors, who see strong growth potential in this sector.
And danger is everywhere. The number of connected objects will skyrocket in the next few years and become exponential, with an estimated doubling between 2023 and 2025 according to data from Pictet Asset Management. The security sector’s most valuable asset, cited by Yves Kramer, Managing Director of Pictet-Security strategy, is Palo Alto Networks, the world leader in cybersecurity. Its mission: to protect our digital lifestyle by preventing cyber attacks. “Hackers are always one step ahead in their cyber-attack techniques,” says Yves Kramer. And the Californian firm is obliged to renew its software with innovations and provide its customers with highly effective and innovative cybersecurity on clouds, networks and mobile devices. Its sales are growing steadily. “It’s the card we have to play when it comes to safety. However, to optimise performance with volatility, it is wise to adapt the weighting of this stock over time, increasing it when it is felt that the price has corrected too much or reducing it when the stock is being pushed up too enthusiastically” Its share price has already increased fivefold since 2019, but Yves Kramer continues to place the stock at the head of his fund. The manager goes on to emphasise that the security sector is undergoing a constant revolution. “You have to adapt your portfolio to changes. The risks we were concerned about 17 years ago, when we launched the fund, are very different today and will be tomorrow too. The portfolio needs to be constantly adapted”.
The growing need for security in smart cities
By 2050, 68% of the world’s population will live in urban areas, compared with less than 50% today, and this is even more true in emerging regions. Consequently, this growing urbanisation requires major investment in infrastructure, which must be secure. Cities’ budgets for equipment to protect their populations and secure their infrastructure (hospitals, airports, schools, power stations, etc.), to become more efficient and sustainable, are bound to increase. Mass transit, critical infrastructures and the major public events that make up the life of a city require the implementation of security measures. Another boon for firms active in this niche. “If a critical infrastructure were to suffer a major incident, the social and economic costs would be excessively high for both the population and the political players,” explains Yves Kramer. Finally, governments, aware of the growing complexity of products and the public’s desire for protection, are increasing the number of regulations, thereby ensuring the growth of the sector for many years to come.
Safety is also in the details and there are many niches. For example, in the new fire regulations. Following a 27% increase in fires in commercial buildings in the United States over the last 10 years, the demand for fire protection systems has multiplied.
Favourable rate cut
The fall in interest rates is also likely to be a positive factor for this sector, with the impact of financing in non-residential construction. Just think of the number of checks, software requests and upgrades already required for heating, ventilation and air conditioning systems in establishments.
Rachele Beata, who also manages the Pictet-Security strategy, points out that: “the fund has outperformed the global equity index since launch for a similar risk (performance/risk). What’s more, the strategy offers very attractive diversification across the different segments of the global equity index, making it an optimal choice”.
“Safety has gone from being a necessity to an obligation,” concludes Yves Kramer. A phrase that can be applied to the stock market with a security sector that, in a portfolio, will contribute to performance, with an estimated average annual growth rate for the sector of between 7 and 9%.
