Global Defense & Security Certificate The … in the civil field from space exploration to...

Weekly Barometer 25 janvier 2012

Global Defense & Security Certificate – The Contribution to Peace

July 2017

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

➢ The best way to maintain peace is to have a strong defense. The global geopolitical instability

and Donald Trump’s presidency are major positives for defense spending

➢ While Trump’s initiatives will spark +10-15% growth on US defense spending, Trump’s election is

also having some knock-on effects on US allies, specifically on NATO members

➢ Even if the US defense budget and most budgets across the world are well balanced between

air, sea and land, most of the big dollars over the next few years will be spent on submarines

and ships, next-generation aircrafts and unmanned vehicles

➢ As new projects come online, contractors should benefit from significant revenue upside

➢ Developments in the civil field from space exploration to biometrics or cyber security are of

utter importance given their close links with defense

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

Security

Devices


Innovation Shapes Defense and Security

➢ Many tech innovations come from Defense

✓ the GPS positioning system was first created by the US

Department of Defense (DoD)

✓ iRobot, before developing consumer vacuum robots, had

deployed the first ground robot used by US Forces in

conflicts

➢ Governments are making scientific and engineering research a

high priority

✓ the EU plans to create a common research fund for new

military technology

✓ cyber and R&D are top priorities for the US government

• federal budget authority for R&D continued to

increase in FY2016 (+7.5%) with a further increase

proposed for FY2017 (+3.3%)

• in 2015 the US DoD opened the Defense Innovation

Unit Experimental (DIUx) in the Silicon Valley to

support the innovation of disruptive technologies with

potential military value


Science Fiction Is Becoming Reality

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/


New “Iron Man” Military Exoskeletons: Lighter And More Efficient

Future Helmet – high precision visors,

sensors

Motorized limbs – help carry

the added weight from high tech

components while running or

climbing

Power –

Batteries, cooling systemPhysiological system – monitors

body temperature, heart rate,

body position and hydration levelsLiquid body armor – light and

flexible. When a bullet hits, the fluid

solidifies and absorbs the impact

over a wider area

Military’s vision of a future exoskeleton

The Best Way To Protect Peace Is To Increase Military Spending

➢ After years of cuts (2011-2015), global defense budgets were on the rise for the first time in

2016

➢ An Unstable and Volatile Geopolitical Situation

✓ terrorism, austerity, conflicts…

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

✓ supplemental budget requests (like the $25.2bn one for FY17) will feed the momentum


USA Department of Defense Budget (US$ bn)

495.5 496.3 497.3

521.3 523.9

556.7

+25.2

+17.8

440

460

480

500

520

540

560

580

600

FY2013 FY2014 FY2015 FY2016 FY2017 FY2018

DoD FY 2018 President's Budget; notes: excludes Overseas Contuining operations (war funding)

DoD FY 2017 President's Budget; notes: excludes Overseas Contuining operations (war funding) Source: US Department of Defense

549.1

574.5

Supplemental

budget

requests

The Length Of Defense Cycles Offers Strong Visibility For Investors


➢ It’s worth noting that 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

A Topline of US Defense Budget History Spending on National Defense,

in billions of 2005 Dollars

Catalysts All Around The World: the Global Geopolitical Instability

9Global Defense & Security Certificate

Asia

-Modernization budget strength

-Trump election

USA

- NATO: Pressure by US on EUR defense spending - European defense fund proposal

Europe UK

- Brexit:

US influence in Europe?

Defense budget reallocation in

EU army?

- Trident nuclear submarines

program

- Political instability

- Terrorist groups

-Growth of Chinese influence in the Chinese Sea

-End of Asian Pivot?

Africa & Middle East

Source: AtonRâ Partners; Heidelberg Institute - Conflicts in 2016

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

Exposure To The Main Defense Segments

➢ Land

✓ Combat vehicles

✓ Tactical vehicles

➢ Air

✓ Fighters

✓ Military plans

✓ Helicopters


➢ Sea

✓ Carriers

✓ Submarines

✓ Combat boats

➢ Defense

✓ Drones

✓ Missiles

✓ Satellite

✓ Cybersecurity

Global Defense & Security Certificate

➢ 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

13

Focusing On Military Aircrafts, Naval Ships And Drones

30%

28%

24%

18%

2015 US Military budget, by department

Navy

Air Force

Army

Defense Wide

Source: Comptroller.defense.gov; AmericanProgress.org

➢ Drones also a top priority given:

✓ surveillance needs

✓ precision weapon functions

1.65 2.07 1.82 2.253.42 3.75 3.78 3.80 3.71 3.71

1.71

2.172.14

2.44

2.682.66

3.48 3.75 3.83 3.91

0

2

4

6

8

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

bu

dge

t in

bill

ion

USD

Estimated global and US procurement budget for UAVs (Drones)

United States Rest of the world

Source: AtonRa Partners, Sipri, Statista

Growth Accelerating Thanks To Massive Projects


➢ Modernization budget in US

➢ Massive defense projects

✓ Aircrafts:

• Expected orders for Rafale fighter from India and UAE

• F-35

✓ Ships/submarines:

• Boost from instability in Asia (disputes over islands in

the South China Sea) and in North Africa (Mediterranean

Sea)

• US Navy is expected to replace its aging fleet of submarines

• Defense officials seeking to increase the US Navy fleet

by 83 ships (from 272 to 355 ships)

• Trident nuclear submarines program in the UK

✓ The main source of revenue for contractors

✓ Most recent DoD budget increases have been directed

towards modernization

✓ Expected to rise faster than the overall defense budget

in FY18E-FY21E


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

✓ demonstrate ballistic missile technology

✓ and develop other military applications

Space Exploration Has Close Links With Defense


Satellites have four major roles

➢ Today, 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


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

➢ States and international organizations:

USA: Homeland Security Department;

US Cyber Command

Creation of “information operations forces”

within the Russian army, 2017

Publication of China’s first national

cybersecurity strategy in Dec. 2016

Europe: NIS Directive dated July 2016

NATO: “Cooperative Cyber Defence Centre

of Excellence”, NATO Industry Cyber Partnership

➢ Corporations:

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

2021, a 10.6% CAGR (Source: Research and Markets)


Biometrics To Identify and Target

➢ 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 buildings

✓ accessing devices

✓ unlocking car doors

✓ opening one’s house door


➢ Semiconductors, electronics and

robotics

Other Innovations Are Also In Play

➢ Security devices & services

✓ Inspection device makers

✓ Security services providers

(Securitas, G4S…)

✓ Graphics cards providing computing power

✓ Robotics

✓ 3D printing


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

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.

21Disclaimer

Global Defense & Security Certificate The … in the civil field from space exploration to...

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