How quick-thinking investors can benefit from rise of cyber threats

The pace and pervasiveness of structural change can feel exciting, and sometimes a little scary. Technological innovation, shifting demographics and climate change are all interacting with the way we live, work and play to create permanent transformations in society.

For example, the proliferation of smartphones means we no longer need a physical credit card or camera, the use of cloud-based collaboration tools to interact with our colleagues has increased workplace productivity, and artificial intelligence (AI) is changing the way people search for information and produce content.

Cybersecurity has traditionally focused on detecting malware and installing firewall security systems, but that is starting to change.Credit: Getty Images

From an investment perspective, these seismic shifts create opportunities to benefit from emerging long-term investment themes.

To start with, structural change creates new markets with growing long-term customer demand. Corporate and government spending on areas such as cybersecurity, cloud computing, robotics and AI is expected to continue to grow as these technologies are integrated into our daily lives.

Structural change also allows innovative companies to create new products and services in adjacent spaces. For example, cybersecurity has traditionally focused on detecting malware and installing firewall security systems.

But more recently, cybersecurity companies such as Crowdstrike, Check Point Software and Fortinet have expanded their service offering into areas such as endpoint security and SOAR (security orchestration, automation and response).

Thematic investing is compelling, but investors should carefully consider how it is incorporated into their overall portfolio.

For individuals today, online privacy and safety are arguably at greater risk than our physical safety when walking down the street. Establishing rigorous cybersecurity systems in industries such as critical infrastructure has also become front-of-mind as governments across the world prioritise national security.

These trends will underpin earnings for companies in these industries, which will support long-term share price growth. While short-term share price performance is susceptible to sentiment and valuations, it’s often overlooked that long-term performance is largely driven by earnings growth.

An emerging industry may experience growing aggregate demand for its products and services, but structural change and innovation can upend the competitive landscape within that industry overnight.

In a fast-growing industry it’s notoriously difficult to pick which companies will become dominant over the next decade and which companies will fall by the wayside. Even experienced, professional stock pickers often fail to get it right over shorter time-frames, so attempting to pick long-term winners in a dynamic industry is challenging, to say the least.

As a result, it makes more sense to invest across a range of companies that capture the growth in the industry or theme as a whole, leading many Australian investors to add exposure through thematic ETFs.

Not only are increasingly sophisticated threat actors forcing companies, governments and individuals to spend more on cybersecurity, that spending has been found to be relatively resilient across the economic cycle. This provides a very different investment opportunity than established, cyclical industries such as mining or banking.

While Australian investors have long shown a preference for local companies in their portfolio, the rise of disruptive technology is a global phenomenon, with the leaders in many growing new industries listed in the United States, Asia or Europe – rather than Australia.

Thematic investing is compelling, but investors should carefully consider how it is incorporated into their overall portfolio. For many investors, focusing the core of a portfolio on diversified, low cost exposures to major asset classes such as Australian shares, international shares and fixed income, is a good place to start.

An investor may then wish to add growth potential through a thematic exposure such as global cybersecurity, artificial intelligence or cloud computing.

Cameron Gleeson is a senior investment strategist at asset manager Betashares.

• Advice given in this article is general in nature and not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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