Global security – the global situation creates a red-hot investment trend
In the wake of Russia's invasion of Ukraine, defense spending around the world has been increased. It has created expectations of rising order intake, higher turnover and rising profits for companies in the defense industry and cyber security. Joakim Agerback, manager of the global security fund Finserve Global Security Fund, believes that the revaluation is only in its infancy and that greater effects are to be expected, especially if tensions between China and the United States increase.
"Companies in defense and cyber security have of course benefited as a result of the conflict in Ukraine, but we saw that these companies would increase in value as only a matter of time. We think many companies in the industry still look attractively valued in view of the global geopolitical situation. We are convinced that the sector will be a winner in the long term," says Joakim.
Increased defense funding – a long-term value driver
According to the administrator, it is clear that increased defense funding has become a direct consequence of the invasion, at the same time only 8 out of 30 NATO countries reach the 2024 goal of spending two percent of GDP on defense spending.
"We will see many countries within NATO speeding up development towards the two percent goal. Sweden has also expressed that they should get there as soon as 'practically possible'. This will require huge investments in defense equipment," says Joakim, who at the same time emphasizes that the effect of this will be continuously reflected over time in the portfolio companies' results and cash flows."
"You have to see these trends in a longer perspective, orders that are placed now will in many cases not be delivered until two to five years from now and thus do not affect the cash flow in the short term. However, you can already see that the order books are being replenished and the companies will have more long-term and profitable business relationships."
Cyber security – huge growth potential
The area that Joakim points out as interesting in the short term is cyber security.
"Within cyber, it is likely that states will act more quickly to ensure adequate defense. Good cyber security has become increasingly vital for a well-functioning and safe society in line with continued digitization.”
"Industry revenue is expected to grow at a 13 percent annual rate between 2022 and 2027 and is estimated to approach $300 billion by the end of this period," says the manager.
Mixture of security and growth
In the Global Security Fund, traditional defense companies such as Lockheed Martin, Northrop Grumman and L3 Harris are mixed with purely growth companies in cyber such as Crowdstrike, which Joakim believes provides a good balance between security and growth, where the common theme is security. The portfolio also includes companies with exposure to infrastructure in space, which is already an essential part of society's digital infrastructure today and which the manager believes will only increase in importance.
"Through the fund, you get exposure to a well-balanced portfolio of safe companies with stable cash flows and long government contracts, combined with the growth potential that cyber security and space contribute. In addition, you get built-in protection against geopolitical risk.”
“For the past 20 years, the defense and security industry has been underinvested, among other things due to budget constraints and public opinion, but the pendulum has swung and security will be prioritized both by companies but primarily by states. Many have realized that the defense industry is needed for us to be able to achieve the UN's goals of peaceful and inclusive societies."