global defense & security certificate the contribution to … cyber security market is expected...

Weekly Barometer 25 janvier 2012

Global Defense & Security Certificate – The Contribution to Peace

January 2018

ATONRÂ PARTNERS SA 12, Rue Pierre Fatio – 1204 GENEVA – SWITZERLAND - Tel: + 41 22 310 15 01 http://www.atonra.ch

Global Defense & Security Certificate 2

Investment Case

➢ Like many other industries, defense is in the early stages of its digital and tech transformation as

innovations in artificial intelligence, robotics and augmented reality make their way to the battlefield

➢ This tech upgrade cycle gives confidence that the current government spending momentum (fueled by

geopolitical tensions) will last several years and that private contractors will keep delivering above-

consensus revenue and earnings growth

➢ Space exploration could be another major source of upside for private contractors as the US plans

missions to the Moon and beyond and as the new NASA Administrator is a proponent of outsourcing

some of the NASA’s operations to the private sector

➢ Government-led space exploration will also give a boost to commercial space in the medium term

➢ Civil security will also be in the spotlight as the Internet of Things opens the way to new cyber

attacks and as smart cities become reality, pointing to strong demand for smart devices, inspection and

detection systems and cyber security

Global Defense & Security Certificate details

✓ Issuing bank: Natixis, Calculation agent: Natixis SA

✓ ISIN: XS1317057278

✓ Currency: USD

✓ Fees: 1.65% management fee + 15% performance fee, high water mark

✓ Bloomberg ticker: NXSRGDEF


Space

Biometrics &

CyberSecurity

Military

Technologies

Security

Devices

Smart Cities &

Homes


Defense And Innovation Share A Common History (I)

➢ Many civilian technologies and innovations find their roots in military missions. The CIA has its

own venture capital company that invests in Silicon Valley start-ups (Q-Tel)

Defense

Innovation


Defense And Innovation Share A Common History (II)

Military

Medicine

The Defense Advanced

Research Projects Agency

(DARPA), responsible for

the development of military

technologies, has been

working for years on

Exoskeletons

The military played a role

in the development of

vaccines in order to fight

epidemics

The first automatic injection

device, the ComboPen, was

invented in the 70s for a military

use. The civil device to treat

allergic reaction, the Epipen, was

approved in 1987 by the FDA

The first blood bank was

created in 1917 for the US

Army Medical Corps. Blood

could be stored and used in

battlefield surgery. It paved the

way for modern blood storage

techniques


A Major Tech Upgrade Cycle Is On Its Way (I)

Future Helmet – high precision visors,

augmented reality, sensors

Motorized limbs – help carry

the added weight from high tech

components while running or

climbing

Power – Batteries, cooling system

Physiological system – monitors

body temperature, heart rate,

body position and hydration levels

Liquid body armor – light and

flexible. When a bullet hits, the fluid

solidifies and absorbs the impact

over a wider area

The soldier 2.0


A Major Tech Upgrade Cycle Is On Its Way (II)

Stratobus – project for 2020: half

satellite and half drone (Thales)

Cyborg Insects –battlefield reconnaissance

Tracking bullets –unprecedented accuracy in combat

Space-Based Laser –intercepts missiles or destroys

satellites

Invisible vehicles – becoming invisible to hostile

thermal imaging systems (technology called ADAPTIV

made by BAE Systems)

The high tech camouflage system uses modules (a) covering the vehicles

that can be cooled or heated up very quickly as well as controlled individually,

allowing different patterns to be created (b)

a/

b/

This Tech Upgrade Cycle Will Fuel An Already Strong Momentum

➢ An unstable and volatile geopolitical situation: external and internal threats

➢ Donald Trump’s FY18 budget points to a massive acceleration in defense spending:

✓ supplemental budget requests (like the $24.9bn one for FY17) will feed the momentum

➢ NATO countries meeting the 2% of GDP target points to $100bn spending upside


USA Department of Defense Budget (US$ bn) last update: November 2017

495.5 496.3 497.3

521.3 524.6

622.0+24.9

440

460

480

500

520

540

560

580

600

620

640

FY2013 FY2014 FY2015 FY2016 FY2017 FY2018*

Supplemental budget requests (March Request for Additional Appropriations)

DoD Budget; notes: excludes Overseas Contuining operations (war funding)

*

549 bn

* For FY2018: The president budget was $574 bn (May). In November, the US congress supported a plan of $622 bn (excl. OCO) in defense spending (should be updated in February 2018)

Catalysts All Around The World: The Global Geopolitical Instability

9Global Defense & Security Certificate

Asia

- Modernization budget growth

- Senate Increasemilitary spending

- Tax reform

USA

- NATO: Pressure by US on EUR defense spending 2% GDP- European defense fund in 2025

Europe UK

- Brexit:

US influence in Europe?

Defense budget reallocation in

EU army?

- Political instability

- Terrorist groups

-Growth of Chinese influence in the Chinese Sea

-End of Asian Pivot?

- North Korea nuclear rally

Africa & Middle East

Source: AtonRâ Partners; Heidelberg Institute - Conflicts in 2016


➢ During the Cold War, the US and the Soviet Union used space exploration to:

Space Exploration Enters Into Its Next Chapter

➢ The return to the Moon and the potential first journey to Mars planned by the US are intended to

develop other

military applications

demonstrate ballistic

missile technology

Ensure the survival of the human species

Better understand our planet

Get some hints about the origin of life

CST-100 Starliner is planning to fly

for the first time NASA astronauts

to the ISS by December 2018


Space Exploration A Major Source Of Revenue For Private Companies

➢ The NASA budget is expected to balloon over the years to fund these new space missions

➢ Importantly, the NASA is expected to develop public-private partnerships with the likes of:

(Northrop Grumman)

Dragon V2, a new version of

the spacecraft, will take

astronauts to the space station

Cygnus spacecraft is on its way to

the International Space Station


Commercial Space To Develop In The Medium Term: Space Tourism First

Georges Whitesides, CEO Virgin Galactic

Blue Origin (Jeff Bezos) is developing

the New Shepard to enable short-

duration space tourism Virgin Galactic (Richard Branson)

provides suborbital spaceflights to

space tourists

SpaceX CEO Elon Musk

shared a picture of his

company’s new space suits


Asteroid Mining Will Fuel Travel Within Space: A Modern Day Gold Rush


Satellites have four major roles

➢ Space exploration is a source of innovations in the fields of healthcare, materials, robotics and

transportation systems

➢ But also remains important in defense-related fields such as aeronautics and IT & Telecoms

(satellites)

➢ Satellites appear as a major actor in the global security value chain, creating the fundamentals

for telecommunication technologies

Satellites Make The Link Between Space And Earth

➢ Thanks to the Internet of Things and Artificial Intelligence, smart cities are about to become reality

✓ Traffic and parking space management, safety and law enforcement and smart grids will

be in the spotlight


The Rise Of Smart And Safe Cities (I)


The Rise Of Smart And Safe Cities (II)

FACIAL RECOGNITIONBODY-WORN CAMERAS

CYBERSECURITY

SENSORS AND DRONES

SMART HOME CAMERASSECURITY CAMERAS/

VIDEO ANALYTICS


Biometrics To Identify, Target and Protect

➢ Biometrics uses facial image, fingerprint, iris, DNA or voice pattern to identify individuals

✓ the US Department of Defense is working with multi-modal biometrics (ABIS- Automated

Biometric Identification System), a combination of above mentioned technologies

✓ Biometrics has many applications in the civil world as well:

Accessing

corporate buildingsAccessing devices

Opening one’s

house doorUnlocking car doors


The Internet of Things Opens the Way to New Cyber Attacks

➢ All connected devices and systems will be exposed to security threats

➢ Attacks on the IoT will hit healthcare, financial services, manufacturing…

50% of new business processes and systems will include an IoT

component by 2020 (source: Gartner)

Pacemakers can be

attacked remotely

ATTACKS

Take control Steal information Disrupt servicesControls for smart doors

locks or lighting systems can

be vulnerable

Infotainment systems are exposed to threats


Cyber Security: A Major Action Field For Both States And Corporations

➢ The cyber security market is expected to grow from USD 122 bn in 2016 to USD 202 bn by 2021, a

10.6% CAGR (Source: Research and Markets)

➢How to protect against cyber attacks?

Network security

Data encryption

Data encryption translates data into

another form, or code, so that only

people with a secret key can access

Security features such as antivirus and

antimalware as well as firewalls and

intrusion prevention and detection

systems

Data analytics

Authentication security

Robust authentication mechanisms

such as two-factor authentication,

digital certificates and biometrics

Collecting and monitoring data to

build predictive and anomaly

detection models

➢ Two directives will boost the level of cybersecurity in the European Union


➢ All companies involved in the digital transformation will have to reach a standard of protection

Cybersecurity Spending To Get A Boost From Regulations

Conclusion: Innovation At The Heart Of Both Civil And Military Security

➢ Technology as a driver of defense capabilities

✓ Land: Unmanned vehicles /

Drones

✓ Sea: Submarines / Carrier /

Destroyers

✓ Air: Fighters / Bombers / Transport

planes

✓ Space: Ballistic missiles / Military

spacecraft


➢ Innovation at the service of security and public safety

✓ Satellites & telecommunications

✓ Real time surveillance & smart cities

✓ Cybersecurity & biometrics

✓ Security of IoT devices


Ethical Standards

AtonRâ Defense & Security certificate does not invest into companies which

manufacture anti-personnel mines and cluster bombs

We also avoid companies manufacturing chemical weapons


APPENDIX

A Huge $1.68bn Defense Spending Bill Globally, With Significant Upside In NATO (I)


Source: AtonRâ Partners & www.sipri.org

➢ Top 5 spenders account for 61% of global military spending in 2016

In billion USD

36%

13%4.1%3.8%

3.3%3.3%

2.9%

2.7%2.4%

2.2%

26% USAChinaRussiaSaudi ArabiaIndiaFranceUnited KingdomJapanGermanySouth KoreaOthers

($ billion)

55.9

63.7

69.2

215

611

0 100 200 300 400 500 600 700

India

Saudi Arabia

Russia

China

USA

Top 5

spending:

$1,015bn

3.6% GDP

1.9% GDP

5.3% GDP

10% GDP

2.5% GDP

➢ Geographical breakdown of global defense spending in 2016


A Huge $1.68bn Defense Spending Bill Globally, With Significant Upside In NATO (II)

➢ NATO Meeting The 2% Of GDP Target Points To $100bn Spending Upside

Source: AtonRâ Partners & www.nato.int

3.61%

2.38%

2.18% 2.15%

1.79%

1.55%1.47% 1.41%

1.28%1.20% 1.19% 1.16% 1.15% 1.12%

1.04%0.97% 0.93%

0.81%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

NATO’s

2% of

GDP

target

Defense Expenditure in 2016 as a % of GDP in NATO

➢ Since WWII, each defense cycle has lasted between 5 and 10 years on average, suggesting that the

current upcycle could run until 2020 at least

The Length Of Defense Cycles Offers Strong Visibility For Investors


An Overview of US Defense Budget History

Focusing On Military Aircrafts, Naval Ships And Drones


➢ Even if the US defense budget and most

budgets across the world are well balanced

➢ We believe that the focus will be on:

✓ next generation aircrafts,

submarines and ships

➢ Drones also a top priority given:

✓ surveillance needs

✓ precision weapon functions

30%

28%

24%

18%Navy

Air Force

Army

Defense Wide

Source: Comptroller.defense.gov;

2015 US Military budget, by département

This report has been produced by the organizational unit responsible for investment research (Research

unit) of AtonRâ Partners and sent to you by the company sales representatives.

As an internationally active company, AtonRâ Partners SA may be subject to a number of provisions in

drawing up and distributing its investment research documents. These regulations include the Directives

on the Independence of Financial Research issued by the Swiss Bankers Association.

Although AtonRâ Partners SA believes that the information provided in this document is based onreliable sources, it cannot assume responsibility for the quality, correctness, timeliness or completenessof the information contained in this report.

The information contained in these publications is exclusively intended for a client base consisting ofprofessionals or qualified investors. It is sent to you by way of information and cannot be divulged to athird party without the prior consent of AtonRâ Partners.

While all reasonable effort has been made to ensure that the information contained is not untrue ormisleading at the time of publication, no representation is made as to its accuracy or completeness and itshould not be relied upon as such.

Past performance is not indicative or a guarantee of future results. Investment losses may occur, andinvestors could lose some or all of their investment.

Any indices cited herein are provided only as examples of general market performance and no index isdirectly comparable to the past or future performance of the Certificate.

It should not be assumed that the Certificate will invest in any specific securities that comprise any index,nor should it be understood to mean that there is a correlation between the Certificate’s returns and anyindex returns.

Any material provided to you is intended only for discussion purposes and is not intended as an offer orsolicitation with respect to the purchase or sale of any security and should not be relied upon by you inevaluating the merits of investing in any securities.

28Disclaimer

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