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.

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

The nuts and bolts of family trusts

There are well over 800,000 family trusts in Australia, controlling more than $3 trillion of assets. Here's a guide on whether a family trust may have a place in your individual investment strategy.

Welcome to Firstlinks Edition 581 with weekend update

A recent industry event made me realise that a 30 year old investing trend could still have serious legs. Could it eventually pose a threat to two of Australia's biggest companies?

  • 10 October 2024

Welcome to Firstlinks Edition 583 with weekend update

Investing guru Howard Marks says he had two epiphanies while visiting Australia recently: the two major asset classes aren’t what you think they are, and one key decision matters above all else when building portfolios.

  • 24 October 2024

Preserving wealth through generations is hard

How have so many wealthy families through history managed to squander their fortunes? This looks at the lessons from these families and offers several solutions to making and keeping money over the long-term.

A big win for bank customers against scammers

A recent ruling from The Australian Financial Complaints Authority may herald a new era for financial scams. For the first time, a bank is being forced to reimburse a customer for the amount they were scammed.

The quirks of retirement planning with an age gap

A big age gap can make it harder to find a solution that works for both partners – financially and otherwise. Having a frank conversation about the future, and having it as early as possible, is essential.

Latest Updates

Investment strategies

Warren Buffett is preparing for a bear market. Should you?

Berkshire Hathaway’s third quarter earnings update reveals Buffett is selling stocks and building record cash reserves. Here’s a look at his track record in calling market tops and whether you should follow his lead and dial down risk.

Economy

US election implications for investors and Australia

The return of Donald Trump to the US presidency brings the prospect of more US tax cuts and deregulation, but also more tariff hikes, trade wars and policy uncertainty. Here's what it means for markets going forward.

Retirement

The rising tension between housing debt and retirement balances

Australians are taking more mortgage debt into their 60s than ever before. Retirement planning assumptions haven’t adapted and could result in future income projections that ultimately disappoint retirees.

Investment strategies

Why megatrends can deliver big upside (and downside)

The magnitude and duration of society's most important trends are often underestimated. While these trends are usually touted as a tailwind, one in particular could have dark consequences for many assets.

Property

Fixing the construction industry house of cards

Australia needs to build new homes like never before but construction firms keep going belly up. Unless regulators act now, consumers will continue to carry the can.

Investment strategies

How investor portfolios have become riskier versus history

Risk in portfolios has dramatically increased as time horizons have shortened and investors have piled into equities. It's resulted in a growing disconnect between what investors need and what the financial industry is delivering.

Shares

The abacus, big data and a brief history of indexing

Equity indices have evolved over time, led by step-changes in our ability to manipulate data. Despite the rise of passive investing, they weren't initially meant to be investment tools.

Sponsors

Alliances

© 2024 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. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. 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.