UBS House View – Daily Europe
Mark Haefele, Chief Investment Officer Global Wealth Management, UBS AG
Jon Gordon, Strategist, UBS AG Hong Kong Branch
Vincent Heaney, Strategist, UBS AG London Branch
Christopher Swann, Strategist, UBS Switzerland AG
Andrew Thompson, strategist, UBS Switzerland AG
Patricia Lui, strategist, UBS AG Singapore Branch
In a state visit on Monday, US Vice President Kamala Harris and host Prime Minister Lee Hsien Loong of Singapore announced new bilateral cybersecurity cooperation and data-sharing agreements between their respective defense ministries, treasuries, and cybersecurity agencies.
This came just ahead of President Joe Biden’s White House roundtable cybersecurity talks on Wednesday with the CEOs of Apple, Amazon, Microsoft, and other major private sector leaders. In public remarks before the meetings, Biden reiterated that cybersecurity is a core national security challenge for the US and encouraged private sector leaders to use their power and resources to raise the bar on cybersecurity. China, too, is shoring up its national cybersecurity, with new rules on critical IT infrastructure oversight announced last week and several new regulations governing data-intensive private sector companies.
With governments, the private sector, and individuals all sharpening their focus on cybersecurity risks, we maintain a positive view on the industry:
1. As high-profile attacks grow, governments and companies are spending more on cybersecurity. The size of the global cybersecurity market was close to USD 145bn last year and has been growing by 8% annually in recent years. We expect that rate of growth to accelerate to close to 10% this year. We view cybersecurity as one of the most defensive segments within IT, with spending outpacing the broader enterprise IT sector in the last few years.
2. Individuals and smaller companies are no longer off the radar for attackers. In one recent attack, thousands of small businesses and organizations were compromised due to a flaw in third-party IT monitoring services. That incident suggests that small size or obscurity is no longer an effective shield against cybersecurity attacks. As a result, we think smaller firms may be forced to increase their security-specific spending to avoid disruptions. Individual consumers may also spend more on cybersecurity services and subscriptions.
Market update
Hang Seng –1%, S&P 500 futures –0.2%, with markets cautious ahead of Jackson Hole.
S&P 500 +0.2%, reaching another record high on Wednesday.
Brent crude –0.6% to USD 71.80 a barrel, the first decline in four days on delta concerns.
What to watch: 26 August 2021
• The Fed’s Jackson Hole symposium begins
• Bank of Korea monetary policy decision • ECB publish minutes from July meeting
This report has been prepared by UBS AG and UBS AG Hong Kong Branch and UBS AG London Branch and UBS Switzerland AG and UBS AG Singapore Branch. Please see important disclaimers and disclosures at the end of the document.
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3. Cybersecurity is a key enabler for many structural growth sectors.
Enhanced security spending and services will be needed by key growth
sectors we like, such as 5G devices, fintech (including payments),
greentech (e.g., solar and wind technology), automated driving systems
in electric vehicles, and healthtech (e.g., digitalized health data). With
only 20% penetration, cloud security will be a key future growth driver
for the global cybersecurity market amid a broader shift to cloud and
subscription services, in our view.
So we view a sharpened government focus on improving cyber defense as
yet another growth driver for the cybersecurity industry. Within technology,
cybersecurity is one of several segments that align with our bottom-up
preference within tech for small- and mid-cap names, and as a key enabler of
structural growth themes. The sector increasingly aligns with a broader shift
to subscriptions-based digital services—a market we see growing at around
18% a year through 2025. Click here to read more on structural growth
opportunities.
Caught our attention
• ECB sees limited impact from delta with growth on track. The fast
spreading delta variant will only have a limited impact on the Eurozone
economy, which remains on track for robust growth this year and next,
said ECB Chief Economist Philip Lane in a Reuters interview. Lane said that
Europe’s advanced vaccination campaign and public health measures are
making the region an exception as other countries face fresh strains on
their health systems from surging infections. At the same time, he noted it
is still too early to discuss unwinding of the central bank’s bond purchase
program, saying that the main task for the ECB at September’s meeting
is to decide on the pace of bond purchases for the coming quarter.
Lane’s remarks reaffirm our view that the ECB will continue to adopt
a very accommodative policy stance to support the economic recovery,
justified by very subdued inflation. The ECB’s relatively dovish bias is
likely to see the EUR underperform over a 6–12-month horizon, especially
against currencies exposed to central banks that are normalizing policy.
We maintain our view that global economic reopening remains on track,
as rising vaccination rates and falling hospitalization levels should allow
governments in major nations to keep their economies open. We continue
to advise investors to stay positioned for global reopening and reflation
while protecting against downside risks, as delta-related headlines will
continue to introduce volatility.
• S&P 500’s 50 all-time highs. The S&P 500 closed at 4,496.19 on
Wednesday, another record high. This brings the number of S&P 500 all
time daily highs in 2021 to over 50, which is already more than in each
of the past three calendar years. Against a backdrop of economic growth
and gradually receding inflation, we see further upside for corporate
earnings and equities. Our S&P 500 target for June 2022 is 4,800,
and 5,000 for end-2022. We advise investors to position in stocks that
should benefit from strong economic growth. At a sector level, we prefer
financials, which should be well supported by rising 10-year Treasury
yields, and energy, which we expect to benefit from a further rise in oil
prices in the second half of the year. At a regional level, we like Japanese
stocks as their revenues are highly exposed to the global recovery.
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• German Ifo data signals weaker momentum, but recovery remains
on track. The latest data from Germany’s Ifo Institute confirmed a further
decline in business morale, coming on the back of recently published
leading indicators which signaled a loss of momentum for Europe’s
biggest economy. The Ifo index for August came in at 99.4, compared
to expectations of 100.4, and a revised July number of 100.7. But while
the index has now fallen for a second consecutive month, it remains at
the highest level since April 2019, and its current assessment component
has also improved to the highest level since June 2019 despite fading
expectations—both of which in our view bode well for growth in the third
quarter and the highly cyclical German market’s further upside amid the
ongoing global economic reopening and recovery.
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