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These stocks could follow security measures higher

As travel operators brace for a knee-jerk pullback from nervous tourists, investors in security and defense companies may stand to benefit from redoubled government efforts to stamp out terrorism.

Since the Paris attacks, political rhetoric on stepping up the fight against ISIS has stepped up sharply. French President François Hollande and Belgian Prime Minister Charles Michel have pledged significantly more resources for security forces while U.K. Prime Minister David Cameron has vowed to "build the case" for military intervention in Syria.

Companies with operations focused on diverse aspects of the security industry could see a bump to revenues if the heightened state of alert continues, analysts say.

Among the more obvious potential beneficiaries are Aerospace & Defense companies which manufacture military equipment such as fighter jets and helicopters. Gunships constructed by Northop Grumman and fighter jets manufactured by Lockheed Martin were used in recent Syrian attacks.


Source: U.S. Navy | Flickr

The sector has outpaced the broader market since the Paris attacks, helped by retaliatory airstrikes targeting Syria and parts of Iraq. Indeed, aerospace and defense stocks have been on a tear since ISIS first burst into global consciousness in April 2013 with the S&P Aerospace & Defense Select Index up by more than 50 percent.

However, this outlook must be balanced with existing challenges. These include potential hits to commercial air travel if tourist numbers suffer on a longer-term basis due to fears over a perceived increase in terrorist events. Additionally, after several years of record-breaking sales, predictions for lackluster orders at this year's Dubai airshow were proven correct. The lower oil price is thought to be contributing to a diminished near-term enthusiasm for newly designed high efficiency aircraft. Furthermore, calls for the U.S.'s Department of Defense to slash spending by up to $1 trillion by 2021 could hit the industry.

Read MoreTerror threat: Global travel alert for US citizens

However, Ronald Epstein, sector analyst at Bank of America Merrill Lynch does not see the latter as a threat, saying: "In our view, if the U.S. pulls back its involvement in the Middle East even though the battlefront continues to move to the West, Western Europe will likely have to spend more on defense spending in order to secure its borders and be able to help prevent future attacks."

Beyond the military sub-industry, further security operators may be primed for additional demand. After the Bataclan concert hall bore the brunt of the fatalities in Paris and following the forced abandonment of a football match in Germany due to terrorist threats, companies providing manned services for leisure and tourist events may also see demand spike.

"As the threat landscape in Europe continues to increase in complexity, security companies will be required to operate more closely with national governments. Security directors at most multinational companies recognise that threat assessment is made on a long term view rather than reacting in the short term," Charles Burbridge, Managing Director at Britain's G4S Risk Consulting said.

In addition to physical security, the focus on virtual security has continued to rise, not least given the profound fear that cyber criminals may one day interfere with mass transport and travel systems, provoking fatal consequences. This was a key topic during Chinese President Xi's U.S. visit in September while U.K. Chancellor George Osborne has just dedicated £1.9 billion ($2.9 billion) to tackle cyber crime over the next five years.

Dominance of the cyber security market is bifurcated between specialized Silicon Valley start-ups and old-school behemoths seeking to develop capabilities in this growing space. Cisco is among the established breed of technology firms aiming to pivot some resources towards developing a leading cyber security practice.

A spokesman for the company said: "The increased focus on security is being driven not only by recent events, but by evolving industry trends such as mobility and cloud computing. The added attention to security from all organizations will mitigate risk in the future by preventing more security incidents, as well as reducing the time to detect and respond when they do occur."

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