Telecommunication and 5G

At the end of March we wrote about Industry 4.0 and the internet of things. At the same time, we observed that these phenomena presuppose the high speeds and low latencies that the 5th generation of wireless telecommunications enable and that it was therefore high time to follow the development for the latter.

A diversified investment linked to the 5G business (for example, Vontobel's 5G tracker) may have risen between 3 and 4%, while for example, the OMX index has performed just +/- 0 percent. During the same period, the Swedish 5G giant Ericsson has fallen by 10%, which puts emphasis on the importance of having a diversified approach when exposed to 5G, so that the general development is captured but minimizes the specific corporate risk.

Now that the winds of the trade war are blowing ever harder, although we have seen some signs of a softer stance from China last week, while the signals of recession are increasing in strength, it is important to choose exposure with Fingerspitzengefühl. However, it is not easy to navigate the stock markets when we are always just a Trump tweet from whatever development you can imagine.

As the background growth for the global economy weakens and interest income alternatives fall below zero, it becomes increasingly important to find islands of secular growth, areas that have their own momentum and are prioritized over other areas. All professional investors are chasing yield, a minimum acceptable annual return to cover management costs, or guarantee returns to clients, not least pension customers. Then growth areas are extra attractive, almost regardless of valuation. Remember that all the money that is always there and is thus in the decision to buy new financial instruments such as shares and bonds, or remain in cash. In the same way, all shares must always be owned by someone. Thus, it is only the question of which shares are more attractive than others that matters, rather than which multiples currently apply.

In that perspective, fifth-generation wireless communication is one of the few areas that needs to be expanded to meet the promises of a connected world of self-driving cars, retail products, autonomous mining machines and big data from virtually every product you come into contact with everyday life. It is 5G that makes up the infrastructure, virtual highways and gas stations, which makes everything else run faster and add the value companies and consumers expect. Sure, no companies will go unaffected by the recession that the interest rate curves now announce. But if less ore is to be excavated, fewer buildings are erected and fewer services performed, during a period of reduced optimism and indebtedness, you would rather be exposed to the companies (5G) that can streamline all of the above areas. Rather, in any case, than against the shrinking economic sectors themselves.

We have a very strong stock market year behind us, although some may perceive it as quite volatile. After ten years of bullish and extreme monetary policy, and in the light of an escalating trade and currency war, it is extra important to choose one's position now. If you have a long investment horizon, maybe you are 50 years old and still have a long way to retirement, and want full equity exposure for as long as possible, even if your drawdowns are sometimes quite large, then it may be the independent growth sectors you are looking for. Take the 5G input as one of several options to look into to see if it meets your criteria for growth, risk and valuation. Set it against, for example, a broad and unfocused index weighting, or historically cyclically sensitive sectors such as banking, construction and  engineering, and long-term thematically interesting pharmaceutical, healthcare and biotech companies.

It is always difficult to assess where on the hype curve a technology area is at the moment, but after a period in the spotlight, the trade war seems to have dampened the enthusiasm for 5G temporarily, while at the same time it is easy to see how the economy is becoming more connected and the demands of faster and better networks are growing exponentially. If Amazon, Netflix, Uber, We Work, Facebook, Bitcoin and others are to fulfill their expectations, a communication network of unprecedented performance is needed. This is where 5G comes in. Maybe the timing is not perfect if you are worried about the economy, but frankly, where would you rather have the money?