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Cyber security sector set for growth

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Aneeka Gupta, Associate – Equity and Commodities Strategist, ETF Securities,  believes that cyber security is a key growth sector, offering lower volatility than technology and the broader equity market.

“The global equity market rout since the start of 2016 failed to spare cyber security stocks. Cyber security outperformed technology (Nasdaq 100) and the MSCI World Index by a significant margin of 98 per cent and 202 per cent respectively since 2006, when the Nasdaq 100 began. This timeframe includes both the financial crisis of 2008 and the Chinese market crash in 2015 highlighting the resilience of cyber security stocks against the broader market in today’s digitally driven world,” Gupta writes.
 
“Evidently the spate of cyber threats facing governments, corporations and individuals is driving spending on cyber security. We believe security spending is well positioned to outpace overall IT spending, augmenting their price divergence in the future.
 
“It has become imperative for organisations globally to defend themselves against the widespread economic, operational and reputational damages caused by cyber-attacks. We believe cyber security is better positioned than overall technology, because the subsector benefits from a more diverse revenue stream owing to a wide range of products that appeal to a large customer base. Q4 2015 net income for cyber security posted gains of 25 per cent vs technology that lost 2 per cent over the prior year.”
 
Gupta adds that cyber security is beyond the ‘hype phase.’ “Cybercrime is likely to expand into robotics, artificial intelligence, 3D printing and industrial biology. The growth of the Internet of Things (IoT) allows nearly every car, airline, home appliance or office equipment to be virtually connected, exposing further critical loopholes for hackers to exploit. The requirements for securing the IoT are not straightforward and organisations would need to use a blend of approaches rather than rely on a single solution.
 
“We believe cyber security is past the hype phase. However the world’s increasing reliance on cyber security combined with the sectors higher profitability is steering the sector towards the slope of enlightenment.
 
“Well-publicised data breaches and technical glitches evidently attracted smart money into cyber security. 2015 marked a landmark year in financing for cybersecurity with deals totalling USD11.5 billion.
 
“The intangible need for cyber security is difficult to quantify given the burgeoning cyber-attacks facing the deeply connected world we live in. It is evident cyber security outperformed the broader market over a long horizon and has the elasticity to recover in severe downturns. Current valuations from a price to earnings standpoint provide an attractive entry point to cyber security. We believe cyber security is beyond the trough of disillusionment. In addition the distinctly low beta of 0.88 allows investors to get exposure to one of the fastest growing segments of technology at a comparatively low risk. The record investment in financing and deal making in 2015 is testament to the opportunity cyber security presents.”

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