All megatrends are eye-catching, but some blow your mind more than others. Another 2 billion Asians joining the global middle class by 2030 will reshape the world. As will the Industrial Revolution 4.0 and what that means for data collection and security.
I have written on the coming middle-class consumption many times for The Bull in the past five years and used it to identify several winning stocks leveraged to the trend. Tourism, education and other services companies with a foothold in Asia are particularly well placed.
Cybersecurity is another megatrend that will change everything. Industrial Revolution 4.0 will fundamentally alter how people worldwide live, work and relate. Breakthroughs in artificial intelligence and machine learning will be multiplied by the Internet of Things (IoT).
Data is the fuel for Industrial Revolution 4.0. Tens of billions of connected devices in the IoT will capture and analyse oceans of data to make decisions. Protecting this data through cybersecurity technologies will become a multi-trillion-dollar industry.
Cybersecurity is critical on two fronts. The most obvious is the risk of cybercriminals hacking systems, stealing data and exploiting companies. Cybercrime cost the global economy around $US3 trillion annually, or 4 per cent of global gross domestic product in 2015, estimated Microsoft Corporation. That figure will grow substantially in the next decade.
The second factor is corporation reputation. Companies talk about a “social licence to operate,” but a “digital licence to operate” will be just as important in coming years. Consumers will only give their data to companies they trust to protect that information and use it ethically.
Companies that suffer repeated data breaches that compromise customer privacy, or that have a record of hiding rather than disclosing data breaches, are as good as dead in the digital economy. Without data and digital trust, companies will not be able to compete.
I see cybersecurity morphing from an information-technology issue to one that cuts across organisations. Corporate strategy in the digital economy will need a heavy focus on cybersecurity, from marketing, to human resources, capital allocation and compliance.
This adds up to greater spending on cybersecurity and rapid revenue growth for leading companies in this sector. CyberSecurity Ventures predicts cybercrime damage will top US$6 trillion by 2021 and describes it as “the greatest threat to every company in the world”.
Granted, I am always wary of aggressive headline forecasts and hyperbole around megatrends. But recent trends on global data breaches suggest CyberSecurity’s forecast is on the money. Cybersecurity, a massive threat for industry, is an opportunity for investors. Long-term investors, such as Self-Managed Superannuation Funds (SMSFs) should consider allocating a small part of their global equities portfolio to quality cybersecurity companies.
My preferred approach is Exchange Traded Funds (ETFs) that provide exposure to cybersecurity stock indices. ETFs are low-cost funds that aim to replicate the price and yield performance of an underlying index and are bought and sold like shares.
Cybersecurity ETFs make sense for a few reasons. They provide exposure to dozens of cybersecurity companies in a single trade. Diversification in cybersecurity is vital because for every big winner there will be more losers, such is the uncertainty.
Also, it’s hard for Australian investors to pick offshore winners in cybersecurity. Investing in a sector that has years of high growth ahead, rather than trying to pick individual winners in offshore markets, makes sense and can be rewarding.
The BetaShares Global Cybersecurity ETF (HACK), the only one of its kind on ASX, is the easiest way to play the trend. The ETF is based on the Nasdaq Consumer Technology Association Cybersecurity index, which includes most the world’s largest cybersecurity firms.
I identified HACK for The Bull in July 2017. The ETF returned 32 per cent in the year to July 2018, making it one this column’s strongest ideas in that time. HACK has come off a little in the past two months in line with global falls in the stocks.
As they say in the investment trade, past performance is not a guide for future returns, but I like HACK’s long-term potential.
Chart 1: BetaShares Global Cybersecurity ETF Source: The Bull
HACK suits experienced investors who understand the risks of technology investing and the long-term focus needed with megatrends. About three-quarters of the index comprises US companies, mostly software providers, meaning there is currency risk. Also, many companies in HACK’s index are not well known here and some are mid-caps or small-caps.
With only 33 companies in the index, HACK has more concentration risk than most ETFs, which tend to include many more stocks. Having fewer companies in the index helps improve overall liquidity (as more liquid stocks are chosen). The annual fee is 67 basis points.
Another micro-cap stock identified for The Bull, Family Zone Cyber Safety, has eased slightly since I wrote about it in June. Family Zone has solid long-term prospects as families and schools spend more on cybersecurity technology to keep kids safe online.
Chart 2: Family Zone Cyber SafetySource: The Bull
• Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article you should consider the appropriateness and accuracy of the information, regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at August 15, 2018.