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G-Whizz. Investing in the beneficiaries of 5G

9 April 2019

It’s true that the speed of technology development feels like it’s getting faster and faster – and that’s because it is. It may have taken humankind until 1969 to put man on the moon, but a modern day programmable toaster has more processing power than the systems used for the Apollo missions. In this note, Chi Chan, European Portfolio Manager at Hermes Investment Management, looks at the technology advancements in mobile networks ahead of the global rollout of 5G and the opportunities that could arise for investors from some of the less obvious beneficiaries of the new network.

The speed at which technology is developing is captured by Moore’s Law, the principle that the speed and capability of computers can be expected to approximately double every two years, as a result of increases in the number of transistors a microchip can contain. When Gordon Moore (co-founder of Fairchild Semiconductor and CEO of Intel) made this prediction in 1965, he thought it would continue for at least a decade. Over 50 years later and the evolution of technology is still moving along at breakneck speed. One of the biggest technology rollouts over the next twelve months will be the introduction of 5G across global mobile networks.

The next generation

To put 5G, or ‘fifth generation mobile networks’, into context its worth taking a quick look at the history of mobile telephony. First-generation networks were introduced in the 1980s – analogue networks that only supported voice calls. The launch of 2G digital phones took place in the 1990s and these advanced into carrying text and picture message. The new millennium saw the arrival of 3G, and the introduction of mobile data and video calls. 4G came a decade later, which brought the era of faster mobile internet and streaming services.

The 5G evolution, not revolution

Given the volatility of oil and wheat prices and the exchange rate, the only price levers that the government can control are subsidies for petrol and diesel. However, removing public subsidies in a single blow would be a difficult move following the currency crash and inflation shock, which slashed purchasing power for much of the population.

However, two or three smaller hikes across the next two years could result in the complete disappearance of the fuel subsidy by the beginning of the 2019-20 fiscal year. Equally, if Egypt’s electricity price increases continue to match those of previous years, Egypt’s inflation profile would remain close to 12% through June 2020, with the potential to drop into single digits in subsequent years.

Making the connection

Over the next few years, the global rollout of 5G and the new capabilities that come with it will be a significant driver for certain types of businesses. The benefits for some will be more obvious than others. Nokia, as one of the world’s largest providers of mobile network equipment, is clearly well positioned for a world moving into 5G. However, investors should also be looking at the potential opportunities beyond the obvious which are also set to benefit from the high speed and enhanced connectivity that the new networks will bring.

One of those is Dutch company ASML, the dominant supplier of photolithography systems which are required for the production of any electronic chips. The introduction of 5G, and the expected rapid growth in IoT, means that we expect to see a dramatic increase in the connected devices; all requiring embedded chips.

BE Semiconductor Industries (BESI), another Dutch multinational, produces machines that package electronic chips. As chips get smaller, it becomes increasingly important to keep them cool as excessive heat results in deteriorating performance. Modern packaging has to serve a dual role in physically protecting the fragile chips as well as dissipating heat. BESI is the technology leader in the chip packaging industry, which puts it in pole position to benefit from the trend of growth in microchips.

The dawn of 5G promises to unlock the potential for automation through ultra-quick speeds and low latency and the organisations that will benefit the most from next-generation connectivity will be those that are fastest to embrace the changes as well as those that will be able to capitalise on the new technological requirements.

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