BlackRock’s Thiel warns investors on cybersecurity, US-China tech war

Data breaches are increasingly in the news. But that’s not the only reason why one should care about cybersecurity. We view cybersecurity as a pressing issue, as it has become a flashpoint where countries’ economic and national security interests can overlap, writes Scott Thiel, BlackRock’s chief fixed income strategist and a member of the BlackRock Investment Institute.

US-China tech competition is heating up, amid rising trade tensions between the two nations. These two previously distinct risks are spilling into each other. The US has added China’s Huawei Technologies, the world’s largest telecoms equipment maker, to its “Entity List”, a list of companies deemed a national security risk by the US This designation prevents Huawei and its affiliates from buying or using US technology and components without a license.

In the days following the action, stocks of a slew of industries in the global telecom equipment supply chain fell, with Asian communications equipment makers leading the retreat. One exception: US telecom equipment makers posted gains. This performance pattern may not hold over a longer period of time, we believe. The US ban could damage the global telecom supply chain over the medium term, as there are no simple substitutes for a lot of Chinese tech equipment.

Cyber risks and investment implications

Cyberattacks are increasing in scope and intensity. Cyber actors across the world vary in sophistication and capability, ranging from well-funded government agencies and terrorist networks to criminal groups with poor resources. Their objectives span beyond stealing personal and business information to include broader geopolitical and economic aims. We view cyberattacks as a growing risk to critical infrastructure and increasingly part of the arsenal of nation states.

Geopolitical tensions are driving an increase in the scale and sophistication of cyberattacks, specifically those from nation states or with nation-state backing. This is the backdrop against which the US has moved to restrict the use of Chinese-made equipment that it believes could potentially be used to intercept sensitive materials or disrupt American infrastructure.

The seemingly abrupt US action on Huawei was a long time coming, given the intensifying rivalry between the two countries: The US has long complained of Chinese practices such as forced technology transfer and a lack of protections for intellectual property. China has shown its ambition to lead the development of advanced technologies including the fifth-generation cellular network (5G), yet it remains heavily dependent on the US tech sector.

The chips used in 5G development are dominated by US semiconductor suppliers, for example. US semiconductor suppliers had enjoyed higher demand for their products in recent quarters as some Chinese companies built up their inventories in anticipation of a U.S. government ban; that demand now looks likely to plummet.

Bottom line

We see cybersecurity as an increasingly important risk for all investors to monitor, with implications that cut across sectors, from financials to utilities. This risk has become entangled with concerns about national security, economic competitiveness, and leadership in advanced technologies. We are still positive on makers of semiconductor products related to 5G development over the long term, but believe investors need to pay more attention to potential impacts of geopolitical tensions on the supply chain.

And more broadly, we see potential for such tensions to drive a gradual decoupling of the US and Chinese technology sectors – a reason why we believe there is a case for owning tech companies in both.

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