The era of globalization is ending and economies will not have the same incentives to cooperate. The result could lead to a rise in cyber security attacks.
In fact, cybersecurity threats are on the rise. Data from the World Economic Forum shows that the rising cost of cyberattacks to the global economy is predicted to rise to $23.84 trillion by 2027, a considerable rise from 2022 when this figure was $8.44 trillion.
The same body of research found that only 4% of IT experts globally believe that connected devices are reasonably secure. This data, which comes from a report which surveyed 270 experts around the world, also projects that global cybercrime will grow 15% per year over the next five years, reaching $10.5 trillion by 2025. It’s clear that the problem is real and that it’s getting worse.
What’s less clear is why.
Digitally connected economies and an awareness of their vulnerabilities is nothing new. Therefore, it’s not immediately clear why these figures are expected to rise so much in the coming years.
Here, we look at one possible cause and why the solutions offered by cybersecurity companies will be increasingly in demand.
How Deglobalization Could Raise Cyber Security Threats
Nearly all investors have lived their entire lives in a globalized economy. That environment is now changing for three reasons according to geopolitical expert Peter Zeihan.
First, following WWII, the US used its navy to patrol the global oceans. This meant that all of our allies had unfettered access to the American market and could interact with any country and therefore source any materials they needed. This led to a hyper-globalization setting era in which many players entered the global system and participated under the rules the US set. However, today, the combined economies of the world are three to four times the size of the US and therefore “indirect economic subsidization became less and less tenable,” according to Zeihan.
Second, globalization has also fallen because it is politically unpopular in the US. It is often seen as a cause of job losses as companies outsource work. It is also increasingly seen as a national security threat especially as countries like China become more authoritarian.
Third, globalization is also ending because of demographic changes. Over the decades more people have moved to urban centers. As a result, fewer people worked in agriculture and more worked in services, manufacturing or industrial industries. This led to people having fewer children. In his book The End of the World is Just the Beginning, Zeihan explains that this trend started 75 years ago for wealthy countries and started 40 years ago in the developing world. Now the world is running out of people 40 and under. This is a problem for globalization because the whole point of that system is to sell things. When there are fewer people 45 and under – those who do most of the consuming – the world no longer has the numbers needed to support a globalized system.
We are now entering a new era in which unfettered trade globally is coming to an end. This means that there are fewer reasons for international cooperation leading to a rise in cyber security threats. Countries will face greater competition from each other for resources including intellectual property. This makes large and even mid-sized businesses an attractive target for cyber attacks.
Why Demand for Cybersecurity Solutions Will Rise
The need for cybersecurity solutions is already increasing.
As recently as 2021, organizations globally spent about $150 billion on cybersecurity, according to research from McKinsey. This dollar figure represents 12.4% annual growth. McKinsey’s conclusion is clear: “The gap today between the $150 billion vended market and a fully addressable market is huge.”
Cybersecurity solution providers have an enormous opportunity to fulfill this unmet demand which represents an addressable market of $1.5 trillion to $2.0 trillion.
This rising demand will not only be supported by a divided deglobalized setting. It will also be supported by the increasing trend of digital transformation in which more companies rely on cloud computing leaving them vulnerable to cyber-attacks.
This trend has only accelerated since the pandemic which forced many companies to adopt permanent remote work practices. Research from the Pew Research Center found that about 60% of US workers who say their jobs can be performed from home are working from home all or most of the time.
Cybersecurity: Investing in a Growing Industry
Investors have a chance to benefit from this trend. There are several cyber security funds that offer broad exposure to leading companies in the industry.
L&G Cyber Security UCITS ETF (ISPY)
The L&G Cyber Security UCITS ETF, which aims to track the performance of the ISE Cyber Security UCITS Index, consists primarily (72.1%) of US companies with Israel and Canada coming in at 10.7% and 6.1% respectively. Among the top holdings are Palo Alto Networks, Blackberry (TSX:BB), Cloudflare (NYSE:NET), and Fortinet. The fund’s 5-year performance (NAV) is 48.93% and has an expense ratio of 0.69%.
iShares Digital Security UCITS ETF (LOCK)
The iShares LOCK UCITS ETF is benchmarked to the STOXX Global Digital Security Index. The majority of the holdings (63.67%) are US companies followed by Japan (12.39%), and Germany (3.42%). Top holdings include, Arista Networks, Nutanix, Oracle (NYSE:ORCL), and New Relic. Since its inception date of September, 2018, LOCK has a total return of 6.01%. The fund has an expense ratio of 0.40%.
WisdomTree Cybersecurity UCITS ETF (XLON)
Like the above funds, the WisdomTree Cybersecurity UCITS ETF is comprised mostly of US companies (86.48%). The fund aims to track the WisdomTree Team8 Cybersecurity Index. Some of the top holdings include, SentinelOne, Cloudflare, Crowdstrike, and Tenable Holdings. While the fund’s performance has suffered since its 2021 inception date with a return of -13.25%, its YTD performance of about 11% shows promise.