Wealth Outlook 2024: Economic Security Opportunities

Citi sees potential growth opportunities in cybersecurity, defense deterrents, and energy suppliers among the many possible areas where one can invest into “economic security”. Many of these areas overlap “unstoppable trends” in Digitization/AI, Longevity, Energy Security/Greening, G2-Polarization.

Cybersecurity

With a full slate of elections around the world this year, we’re likely to see greater digital mischief, like fake news and ransomware attacks. Thankfully, there may be software tools to fight these potential threats.

Citi Research’s survey of Chief Technology Officers at large US firms continues to indicate that spending on cybersecurity remains a top item in information technology budgets (Figure 1). When choosing the right solution for combating cyber threats, companies increasingly choose to contract with outside vendors to substantially augment in-house capabilities.

Figure 1: Firm spending on cybersecurity is growing rapidly

Looking at valuations and profitability, the Nasdaq CTA Cybersecurity delivered 14% earnings growth as October 31, 2023 (versus -0.4% for the S&P 500 as a whole. That’s on top of a 36% increase in earnings per share (EPS) in 2022.

Cybersecurity shares have failed to keep pace with this consistent, market-beating earnings growth. Valuations are hovering near early pandemic lows (Figure 2). As we look to 2024, we can see cybersecurity shares potentially rerating to be a source for reliable profits growth in this uncertain world.

Figure 2: Cyber shares have rarely been cheaper despite EPS growth

Energy Security

OPEC’s unusual strategy to lower crude oil production and maintain high prices should allow green energy companies to make new investments in their business. Some non-OPEC related companies have been able to generate higher revenues because OPEC has kept oil prices higher than average (Figure 3).

Figure 3: Saudi production cuts benefit non-OPEC producers

The competitive economics of energy supplies with oil at $80 per barrel are markedly different for producers than at $24, the trough price for Brent reached on average following the last four US recessions (Figure 4).

Figure 4: Benefits show up in creating a floor under US crude prices

A transition away from fossil fuels requires redundant energy supplies to avoid economic disruption. Geopolitical considerations also argue for redundancy. The relatively low valuation of most oil and gas producers, pipelines and equipment makers make them worthy portfolio components to consider. Their equities and bonds have reclaimed their traditional role as a potential source of income while also seeking a direct if partial hedge against shocks and inflation (Figure 5).

Figure 5: These benefits also show up in producers’ high free cash flow yield

Defense Contractors

The division of the world again into “Western” and “Eastern” Cold War blocks has dangerous precedent. However, the arms race of the 1980s showed that deterrents work. NATO nations see no choice but to increase defense spending to avoid a larger conflict. The terrible conflicts in Ukraine, and the Middle East have strained the capacity of U.S. and European defense and arms producers. Share prices appear to reflect worries about government funding and the stress they are under as shipments of defense goods have fallen behind demand (Figure 6).

Figure 6: US Defense shipments vs S&P Aerospace and Defense Index

While Buyer power is always a wild card in this unique segment of the market – with literally just a handful of taxpayer-supported customers around the world setting prices and all the rules – it’s hard to imagine Western defense agencies not doing almost whatever it takes to ensure these companies are able to catch up.

Conclusion

In conclusion, geopolitical risks remain a threat to investors in 2024. This only means investing in more economic security. We advocate for globally diversified core portfolios, staying fully invested and seeking potential opportunities through events that cause fear but not catastrophe.

To find out more about these investment themes, Citi’s relationship team and product specialists are available to build portfolios to match your portfolio objectives, risk profile and time horizon.