MITON’S HENNA HEMNANI: BULLET PROOF

  • Geopolitical events lead to increased risk aversion, but also create investment opportunities
  • The changing nature of international relations makes global security an attractive investment sector
  • Increased government spending on defence will be biased towards defending against cyber attacks

Henna Hemnani, analyst for the Miton multi-asset fund range comments:

“While unstable geopolitical environments often lead to more risk aversion, they can also create investment opportunities. The combination of geopolitical shifts and the exponential rate of technological change is making cybersecurity companies look increasingly attractive.

“Political risk has been much discussed, but geopolitical risk might be an equally important driver of markets this year. Last week alone there were numerous areas of tension including the latest North Korean missile test, further deterioration in US-China relations, particularly territorial disputes concerning the South China Sea, and ongoing regional conflicts in the Middle East. The geopolitical environment feels more unstable than it has done for some time, challenging the globally interconnected world order.

“What’s most interesting is the way in which this is manifesting itself in markets. Historically, an environment of rising global security risk would be beneficial for traditional defence companies and oil companies, with past wars being energy intensive and driving up the oil price. At times oil has even been the cause for conflict itself. Today, our current preference for playing our global security theme is through cyber security companies, as we believe any increase in government spending on defence will be biased towards defending against cyber attack.

“As we become more connected, the damage that can be done by manipulating, stealing or blocking data is ever greater. In terms of economic risk, with global growth deeply intertwined with the continued growth of the internet, it’s been calculated that by 2020 as much as US$3tn of global economic value could be at risk from cyber crime. In terms of political risk, it’s been suggested that hacking and ‘fake news’ impacted elections last year, and there are many more political elections this year in Europe.

“Perceived risk to the corporate, industrial and government information infrastructure from a range of cyber threats has seen a clear and consistent uptrend over the past five years, arguing for greater spend on cyber security, especially as these attacks become more broad based, opaque and generally more innovative.

“Given the high possibility that future wars may be fought online, it’s a good environment for our cyber security sub-theme. The fact that this sector is not especially dependent on economic growth is a further benefit.”

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