Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 369

Is 5G all hype or real investable opportunity?

The impact 5G will have on a wide range of industries is likely to be bigger than we’ve seen with any previous generation of mobile telecoms. Each previous new generation of network has produced a big jump in speed. And we will certainly see this with 5G, which is estimated to be between 10 and 100 times faster than 4G. But 5G is about much more than quicker phone downloads. It brings lower latency, greater network capacity, and significantly extends battery life. In time, this will produce a robust network in which millions more devices will communicate with one another remotely 10 to100 times faster than at present, and it is what opens the door to 5G’s full potential: the capacity for machine-to-machine communication.

What is the timeframe for 5G?

The initial impact will be gradual. Most countries are not yet actively rolling out 5G infrastructure. However, there has been initial build-out in the US, the UK and other parts of Europe, and much more extended implementation in China, South Korea and Australia. China now has at least partial 5G networks in 50 cities and is accelerating 5G implementation. Part of its unannounced fiscal stimulus as a result of COVID-19 could be accelerated spending on 5G infrastructure, and there may also be 5G phone subsidies.

Why is global adoption slow? To some extent, this is an inevitable lag—it took 4G six years to achieve 90% penetration. In the case of 5G rollout, it is partly down to physics: 5G is a high-performance network because of its high frequency, but its shorter wavelengths are more readily absorbed by objects, meaning that the 5G signal doesn’t travel well through buildings and is even absorbed by plants and rain. In practical terms, it needs more base stations much closer together.

Putting a 5G system in place will take some time. It’s not going to be the immediate revolution that some expect.

So what are the opportunities in 5G at the moment? Is it really investable?

Three levels of 5G beneficiaries

A helpful framework for the journey through 5G investment over the next five years is to think of 5G companies in three layers:

5G providers

These are the telecom companies that provide 5G services. While research suggests incremental revenues for telecoms will grow, they are expected to remain relatively small in dollar terms until the middle of the coming decade, when a real acceleration is anticipated, which could in principle be attractive.

But there is a problem: building the infrastructure to access those revenues is going to require massive, upfront capital expenditure, compressing the margins of telecom companies and making them a less-than-compelling 5G investment.

5G enablers

This second layer comprises the organisations building infrastructure and providing the components necessary to take part in 5G. I believe this is currently a much more attractive area than the providers. The demand for cell towers, network equipment, devices, components and data storage requirements over the next few years could see very significant growth.

Examples of the ‘enablers’ include tower providers, which supply sites to telecom companies for their infrastructure. The logistics behind providing a vast interconnected network, particularly in cities, is a huge undertaking, and companies such as American Tower Corporation have an extensive network of tower sites providing coverage and capacity for telecom companies.

The semiconductor industry is likely to be another beneficiary of 5G. High-performance applications such as 5G require even smaller semiconductors. The essential technology required to manufacture these semiconductors is highly specialised, and ASML, which is the global leader in manufacturing the machines that produce the 7nm (nanometer) and lower-node chips, could be a key beneficiary.

Device and component makers that produce memory chips, OLED display screens, mobile phones and consumer electronics (or the Internet of Things) are positioned to benefit from the increased connectivity of 5G. Companies like Samsung have been leading the market developing end-to-end 5G offerings.

Data centre providers are also likely to see growing demand from 5G adoption. These data storage centres allow enterprises to take advantage of 5G mobile networks when accessing cloud infrastructure, while improving network and application performance over low latency connections. Companies like Equinix enable connections between digital ecosystems globally.


Register here to receive the Firstlinks weekly newsletter for free

5G users

These comprise the third level of beneficiary, and this is the area where 5G is potentially a gamechanger because it will enable devices and machines to talk to each other with accuracy and speed. Known as Machine Type Communication (MTC), this technology comes under two main headings.

Massive MTC is where lots of devices exchange large amounts of data but do not necessarily require exceptionally fast response times. Applications could include logistics or smart agriculture. The second category is critical MTC, where not only ultra-reliability is needed but also speed—think of factory automation, autonomous vehicles and traffic safety.

While some of these themes such as factory automation are already familiar to the market, 5G could accelerate the trend. Similarly, autonomous vehicle development is already making significant headway, but 5G could enable autonomous vehicles to start communicating with one another more effectively, allowing greater safety, efficiency and reducing emissions.

I believe MTC is a really exciting part of 5G—it is going to create disruption and enable new services.

Across industries, 5G is expected to lead to a flood of innovation. In health care, it could allow not just online consultations with doctors but monitoring health conditions and remote surgery. In the energy sector, 5G could enable remote facility inspection or repair, and smart grids. Then there is telebanking—being able to speak with a bank teller securely using 5G and, in addition, establishing vastly enhanced security for accessing financial services.

Virtual and augmented reality—VR and AR—are usually associated with entertainment, but they have massive potential in the maintenance of industrial facilities, where they could improve efficiency through faster repairs.

Where are the possible investable opportunities?

There are a number of listed companies that fall under the ‘5G enabler’ category. Importantly, though, they are positioned not just for the growth associated with 5G but for wider secular growth trends around digital disruption. We believe many of these companies represent attractive investment opportunities right now for long-term future growth.

While the real game-changing opportunity could be among the companies that become the ultimate ‘users’ of 5G, this segment is still in its infancy. That means we must be very careful about how we invest in 5G and for that reason, the concept of a fund overly reliant on 5G has limited appeal. The ability to flexibly invest across different themes and ensure that the investment theme evolves over time, just as the investment opportunity evolves, should be more robust.

Capital Group New Perspective Fund (AU) focuses on investing in companies benefiting from a range of secular trends, and one key theme is digital disruption. This includes companies across industry sectors that are using technology to disrupt their markets, and 5G comes squarely under that heading.

Within the fund, we estimate that our total allocation to companies with exposure to 5G, in one form or another, could be as high as 40%. It’s no surprise that companies like Microsoft and Amazon, which are featured in the cloud and artificial intelligence sectors, are important 5G exposures in our portfolio. The same is true of Netflix and semiconductor-related companies

TSMC and ASML. Less obvious examples are companies in the health care sector, such as Boston Scientific, which produces diagnostic monitoring devices, and a leader in robot surgery, Intuitive Surgical. Both of these could potentially leverage 5G technology in the future.

 

Andy Budden is an Investment Director at Capital Group, a sponsor of Firstlinks. This article is general in nature and does not take into account your objectives, financial situation or needs.

For more articles and papers from Capital Group, click here.

 

RELATED ARTICLES

5G is coming: who wins and who loses?

Are there profits from the 5G revolution?

Slowing productivity and its impact on investors

banner

Most viewed in recent weeks

Unexpected results in our retirement income survey

Who knew? With some surprise results, the Government is on unexpected firm ground in asking people to draw on all their assets in retirement, although the comments show what feisty and informed readers we have.

Three all-time best tables for every adviser and investor

It's a remarkable statistic. In any year since 1875, if you had invested in the Australian stock index, turned away and come back eight years later, your average return would be 120% with no negative periods.

The looming excess of housing and why prices will fall

Never stand between Australian households and an uncapped government programme with $3 billion in ‘free money’ to build or renovate their homes. But excess supply is coming with an absence of net migration.

Five stocks that have worked well in our portfolios

Picking macro trends is difficult. What may seem logical and compelling one minute may completely change a few months later. There are better rewards from focussing on identifying the best companies at good prices.

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

Six COVID opportunist stocks prospering in adversity

Some high-quality companies have emerged even stronger since the onset of COVID and are well placed for outperformance. We call these the ‘COVID Opportunists’ as they are now dominating their specific sectors.

Latest Updates

Retirement

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

Interviews

Sean Fenton on marching to your own investment tune

Is it more difficult to find stocks to short in a rising market? What impact has central bank dominance had over stock selection? How do you combine income and growth in a portfolio? Where are the opportunities?

Compliance

D’oh! DDO rules turn some funds into a punching bag

The Design and Distribution Obligations (DDO) come into effect in two weeks. They will change the way banks promote products, force some small funds to close to new members and push issues into the listed space.

Shares

Dividends, disruption and star performers in FY21 wrap

Company results in FY21 were generally good with some standout results from those thriving in tough conditions. We highlight the companies that delivered some of the best results and our future  expectations.

Fixed interest

Coles no longer happy with the status quo

It used to be Down, Down for prices but the new status quo is Down Down for emissions. Until now, the realm of ESG has been mainly fund managers as 'responsible investors', but companies are now pushing credentials.

Investment strategies

Seven factors driving growth in Managed Accounts

As Managed Accounts surge through $100 billion for the first time, the line between retail, wholesale and institutional capabilities and portfolios continues to blur. Lower costs help with best interest duties.

Retirement

Reader Survey: home values in age pension asset test

Read our article on the family home in the age pension test, with the RBA Governor putting the onus on social security to address house prices and the OECD calling out wealthy pensioners. What is your view?

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.