The stocks and funds providing access to this solid investment theme
Thursday 06 Aug 2020 Author: Steven Frazer

Imagine if you were to jump straight from bashing the keys on a typewriter one day, to using the latest laptop the next. The speed and ease would undeniably improve your workday, and make you a significantly more productive, efficient and happy person.

With 5G adoption we are on the cusp of a similarly crucial transformation, catapulting consumers and industry into a new era of superfast connectivity, where downloading movies takes seconds, smart factories crammed with automation are the norm, and cars drive themselves safely and efficiently.

‘Put simply, 5G is revolutionising our communications,’ says a Samsung Insights report.

This technological shift will take several years, not months, and there will be bumps along the way. This has been made abundantly clear with Chinese mobile network equipment being barred in the UK, US and elsewhere, and the recent, and completely unsubstantiated, health rumours about 5G masts.

POTENTIAL VALUE

The global 5G market is projected to reach $668 billion by 2026, according to Allied Market Research, implying compound annual growth of 122%. 5G will enable $12.3 trillion of global economic output, according to a 2018 report from IHS Markit.

The switch to 5G is already well underway, with countries like China, the US, South Korea and Germany joining the UK in leading the way, spending billions since 2015 to get infrastructure in place. There were more than 13 million 5G subscriptions globally at the end of 2019, according to the Q4 2019 Ericsson Mobility Report, ‘signalling the start of a new era,’ the study said.

Investors don’t have to wait as there are myriad opportunities today.

WHAT IS 5G?

5G is the fifth generation of mobile broadband that will eventually replace, or at least augment, current 4G connections. With 5G, consumers will see exponentially faster download and upload speeds, much greater bandwidth to send the explosion of data volumes, and latency (time lag) all but eradicated.

And when we say ‘exponentially faster’ we mean it. 5G’s speed improvement is something to behold, shooting data from A to B up to 20 times faster than 4G networks.

For example, an average movie takes about six minutes to download on 4G. That waiting time is slashed to less than 20 seconds with a 5G connection.

Other benefits include greater device density. You may have been frustrated failing to get text messages sent or calls connected when you are in large crowds, perhaps at a football match or music festival. Try sending texts at midnight on New Year’s Eve, when everyone near you is doing the same.

That network clogging will be a thing of the past with 5G, which is able to seamlessly handle about 10 times the number of devices at once in the same area. This is pivotal for its use in the Internet of Things (IoT) shift. 

Finally, the time delay sending data from point A to point B will no longer be a problem. With 5G, latency plunges 25 times compared to 4G, resulting in almost instantaneous data transfers.

Big deal, you may think. An email pops up a blink of an eye quicker. But think about safety in self-driving cars, where milliseconds could be the difference between a collision or avoiding one. Another example is a top surgeon conducting open heart surgery remotely via robotic tools.

This illustrates why 5G is likely to see a rapid adoption curve in applications to the good of people and business once the infrastructure is in place.

Mobile infrastructure required for 5G 

The complete adoption of 5G will take a few years, but as the technological shift continues to unfold, investors can take advantage of the wave of opportunities it presents.

 Devices

5G-enabled devices will be needed to fully access the network, although some people may experience faster speeds on existing 4G smartphones as 5G is being built on top of existing networks.

 Network access

5G requires many small cell sites – roughly the size of a pizza box – to be built near to one another, to improve network density in urban areas.

 Carriers

The shift to 5G will be a huge investment, but telecoms operators and carriers can consider partnerships to speed up the roll-out and help maximise returns.

Source: McKinsey

It’ll speed up the march towards widespread industrial automation and artificial intelligence applications, make our roads far safer and less clogged by removing the most dangerous element (people, in the case of driving) and introducing things like ‘truck-trains’ going up and down our motorways to improve fuel economy. It will also impact on medicine and healthcare provision.

SUPER-CONNECTED WORLD

5G networks are the perfect backbone for Internet of Things. IoT networks will see millions of gadgets and devices connected via the internet and able to receive and send useful data, supporting increasing device numbers, facilitating growing data transfers, and improving response time among connected devices.

According to McKinsey, 5G will likely speed up the mainstream adoption of the IoT across multiple industries.

Transport

— 5G enables self-driving cars to make split second decisions, making them safer.

— Self-driving vehicles can also connect to buildings, other cars, and even pedestrians in smart cities, responding rapidly to any issues and improving traffic flow.

These two uses are estimated to bring a $170 billion to $280 billion global GDP boost to the mobility sector by 2030, according to McKinsey.

Manufacturing

— 5G could result in high-tech industrial set-ups, using virtual and augmented reality (VR/AR) to boost productivity and precision in ‘dark factories’, entirely automated facilities that need few to zero human workers.

— Analytics and advanced robotics in smart factories can streamline manufacturing processes, leading to efficiency gains and cost savings.

Altogether, the impact could be a $400 billion to $650 billion boost to the industry by 2030, predicts McKinsey.

Healthcare

— While robotic surgeries are not new, 5G could allow these procedures to occur remotely.

— Wearables and other smart medical devices provide real-time updates on patients and make accurate diagnoses.

These two applications will contribute an additional $250 billion to $450 billion in GDP to the healthcare space by 2030, forecasts McKinsey.

OVERHYPE & FAD VALUATIONS

There are threats and challenges to overcome, and investors need to know what they are, and their possible impact. Political risk is probably the most obvious in the wake of Chinese company Huawei’s ban in the UK, US and elsewhere.

In July 2020 the UK ruled that a ban on the sale of Huawei 5G equipment would come into effect from January 2021. The embargo will also force UK mobile networks to strip out all existing Huawei kit by 2027.

This was a national security decision, the UK Government said, following a hearing where both BT (BT.A) and Vodafone (VOD) claimed that the ban would cost them billions of pounds, cause service interruptions, and delay the roll-out of 5G in the UK.

But those claims have been brushed aside by some experts. Richard Windsor from research group Radio Free Mobile says something like 70% to 80% of the network needs to be replaced when upgrading to 5G, ‘meaning that the Huawei equipment will be ripped out regardless of who the 5G vendor is.’

In theory, banning one of the communication infrastructure equipment’s major players would reduce competition which could drive up costs. This could increase the capital expenditure budgets of mobile networks and these costs would have to be passed on, says Zehrid Osmani, who manages investment trust Martin Currie Global Portfolio (MNP).

That could initially taper profits for companies hoping to make hay from 5G, and perhaps reduce returns for investors.

But while national security is paramount, the political decision to ban Huawei kit does not change the need for equipment upgrades or the wider benefits to be gained for businesses, investors and wider society long-term.

With Huawei now out of the picture, Swedish network equipment supplier Ericsson, arguably Huawei’s clearest peer, is seen as the main beneficiary, but don’t rule out Nokia, says Windsor.

The Finnish firm used to be known for its mobile handsets, but it has long since switched to providing communications kit.

‘Nokia has by far the most to rally,’ he says, because instead of being the ‘small player stuck between two giants, now it will be the only alternative to Ericsson.’

For any UK investors interested in these companies, Nokia’s US-listed shares are widely available on UK investment platforms, as are Ericsson’s Stockholm or US-listed shares.

Many listed companies will be hoping to make big profits from this mobile revolution which, if successful, should mean relative share price outperformance and, in some cases, attractive dividend payments.

But don’t get hooked on a 5G fad. ‘Don’t get caught up in the theme story,’ is the advice from Martin Currie’s Osmani, because not everything fifth generation mobile will work out, and not all investments will generate the returns you are looking for.

STOCKS PROVIDING ACCESS TO 5G

The most obvious plays on 5G are the mobile network operators, Vodafone (VOD) and BT (BT.A) – which owns the EE network – in the UK, or perhaps Verizon Communications which has gone live with 5G networks in Chicago and several other US cities.

FTSE 250 firm Spirent (SPT) provides communications testing and connectivity kit and has been busy working on 5G projects. It said in April that the development of 5G ‘continued at pace’ and that it had secured key orders to support customers.

Those exposed to industrial applications, such as automation, robotics, health and transport include engineering software suppliers like London-listed Aveva (AVV), Autodesk and Adobe in the US, and Ocado’s (OCDO) automated grocery fulfilment centres.

Ross Teverson, head of strategy, global emerging markets at fund manager Jupiter, say semiconductor chip makers TSMC and Mediatek have seen lacklustre demand for consumer electronics products being shored up by demand from the roll-out of 5G networks and rising demand from servers as people consume more data and employees work from home around the world.

FUNDS THAT INVEST IN 5G

The Defiance Next Gen Connectivity ETF, or FIVG, was launched in the US in April 2019, designed to track a universe of 78 companies exposed to 5G, be it mobile network operators, infrastructure kit, semiconductors or software for apps.

It is not available to UK investors, yet its portfolio gives an indication of the breadth of companies chiming to 5G’s tune, including Ericsson and Nokia, chipmaker Qualcomm and American Towers, which owns mobile mast networks.

One option that could become available to UK retail investors in the near-term is a 5G Connectivity open-ended fund recently launched by investment manager Neuberger Berman. It plans to invest in a global portfolio of between 40 and 60 companies where at least half of their future earnings will come from 5G adoption and connectivity. The global fund hopes to appear on UK investment platforms soon.

In the meantime, there are plenty of options for UK investors to gain exposure to either 5G directly, or to secondary themes, like automation, internet companies or the general technology space. Here are three to buy:

ROBO Global Robotics and Automation ETF (ROBG) £13.83
This index-tracking ETF is designed to match the performance of companies that not only manufacture and operate robotics and automation systems, but artificial intelligence too.

Spread across 12 sub-sectors, such as 3D printing, logistics automation and healthcare, it offers decent diversification while exposing investors to many 5G beneficiaries, such as machine vision designer Cognex and consumer robot maker iRobot. It boasts 18% annualised returns over the past five years, according to Morningstar.

Pictet Robotics Fund (BDB6DB9) £179.89

This fund invests in companies that make a good chunk of their profits from robotics, automation and its value chain. Key holdings include German industrial automation engineer Siemens, chip giant Intel and US data analytics company, Splunk.

It has returned 66.9% over the past three years, lagging the 71.8% from the Investment Association Technology & Telecoms index over the same period, but smashing the 39% investors would have got from the S&P 500, according to data from FE Fundinfo.

Baillie Gifford US Growth Trust (USA) 216.7p

Typical of Baillie Gifford funds, manager Gary Robinson is not concerned with the here and now; his strategy is to identify and own the exceptional growth companies in America.

5G-focused stocks in the trust’s portfolio include the self-driving ambitions of Tesla, real-time advertising space buying platform The Trade Desk, film and TV streaming provider Netflix and e-commerce group Shopify.

The trust’s shares have doubled since their March 2018 launch, and up 46% since we said to buy last August.

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