The 5G network 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 to 100 times faster than at present, and it is what opens the door to 5G’s full potential: the capacity for machine-to-machine communication.
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 the 5G companies in three layers:
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. 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.
This second layer comprises the organisations building infrastructure and providing the components necessary to build out 5G networks and to access them. 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. Within this segment, the semiconductor industry is likely to be a beneficiary of 5G. High-performance applications such as 5G require even smaller, more powerful semiconductors.
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 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.
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 communicate and transmit more data at speed across 5G networks. 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 very low latency - think of factory automation, autonomous vehicles and traffic safety.
A flood of innovation
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 of health conditions and even the potential for remote surgery. In the utilities sector, 5G could enable remote facility inspection or repair, and smart grids. 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.
We believe many in the “5G enabler” category represent attractive investment opportunities right now for long-term future growth. They are positioned not just for growth associated with 5G but for wider secular growth trends around digital disruption.
While the real game-changing opportunity could be among 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. The ability to flexibly invest across different themes, determined by individual company selection as the opportunity evolves, is likely to be a more robust approach.
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Capital Group is one of the oldest and largest asset management companies in the world, managing multi-asset, equity and fixed income investment strategies for different types of investors. Since 1931, Capital Group has been singularly focused on delivering superior, consistent results for long-term investors using high-conviction portfolios, rigorous research and individual accountability. Today Capital Group works with financial intermediaries and institutions to manage more than US$ 1.7 trillion in long-term assets for investors around the world. Capital Group has an integrated global research network of more than 400 investment professionals and its portfolio managers have an average of 28 years’ investment experience.