Ignore the conspiracy theorists who claim that 5G cell-phone towers cause the coronavirus. It's one of the wackier, more-alarming claims in a conspiracy-filled, often fact-free world. The coronavirus has tracked the location of 5G towers pretty well because, well, they put 5G towers where the most people are. There are more cases when there are more people. Simple as that.
There's no doubt 5G is the future, and for now that future is in Asia. There are 138 million 5G subscribers worldwide as of the end of the second quarter, compared with only 26 million at the start of the year. China accounts for 78% of that total, but Japan and other developed nations are hustling to get their hardware in the ground. Asia is forecast by Ericsson (ERIC) to account for two-thirds of 5G subscriber growth in the next four years.
Gamers are desperate to get their hands on Microsoft's (MSFT) Xbox Series X or the Sony (SNE) PlayStation 5 this Christmas for one key reason: speed. The early insights into the consoles suggest games will have next to no buffering or load time, with games approaching something like video-like quality of image.
Speed is the main advantage for 5G, too. We may think our current phones are fast. Transferring a high-res movie should drop from around 7 minutes to around 6 seconds. The latency of 5G -- think of it as the lag in communication -- will be faster than human visual processing. So Internet of Things devices will communicate faster than we can see, meaning the limitation on how we use devices is going to be down to how quickly we can respond, not how fast the machines respond.
Société Générale debuted an "Asia 5G basket" in February. I'm looking back at that initial report and it rather quaintly notes that Covid-19 cases had grown quickly outside China, mainly in Korea, "raising concerns of a second wave of contagion." The virus threatened to put downward pressure on Asian cyclical stocks, the report stated, with hardware tech companies exposed to supply-chain disruption and production delays at Asian factories.
Asian 5G stocks had just declined 5% in February since a market high on January 17. Of course, they then experienced a massive dip in March, like everything else. But since inception on February 25, the SocGen basket has delivered gains of 21% in U.S. dollar terms, or 7 percentage points better than the MSCI Asia benchmark.
Chipmakers and mobile-phone manufacturers have led the way. Semiconductor stocks have benefited from 5G as well as the Internet of Things that enables smart devices, as well as from extra demand provoked by the pandemic, which has spurred the need for bigger data centers in more-diverse locations. Social distancing has spread our increased data needs out.
Smartphone-parts makers have gained from the U.S. attack on Chinese telecoms Huawei Technologies and ZTE Corp. (ZTCOF) . The export controls on Huawei have given smartphone competitors an advantage, while there was a temporary boost as Huawei hoovered up chips made with U.S. technology ahead of the bans kicking in.
The five largest stocks in the basket, which currently contains 22 companies, are generally available via ADRs to domestic U.S. investors, with two directly listed in the United States. They also have an interesting geographic mix.
Taiwan Semiconductor Manufacturing Co. (TSM) is listed on the New York Stock Exchange, and the No. 1 contract chipmaker in the world. TSMC is scaling up its capacity for 5G chipsets, a trend that will drive its earnings for the next few years. It boosted capex in 2019 by 40% to TW$14.9 billion (US$486 million), almost half a billion U.S. dollars of spending on future capacity to take advantage of the new world of 5G. If you want exposure to the chip-manufacturing industry, TSMC should likely be your first stop, serving all major companies in 5G.
Samsung Electronics (KR:005930) sadly does not have an ADR. So it is far easier for U.S. investors to buy a Samsung phone than the Korean company's stock. It does, however, have a listing in London under the ticker BC94, so if Korean equities are off limits perhaps U.K. markets are easier to access. Samsung is perfectly poised to take advantage of Huawei's difficulty in sustaining product supply of 5G phones. Besides phones, it also makes 5G base stations. Samsung should be able to boost its 5G telecom-network equipment manufacturing business over the next two to three years, gaining ground every time Huawei loses 5G business.
Nidec (NJDCY) is a Japanese electronics component manufacturer that is the world's largest maker of the tiny spindle motors found in hard drives, not to mention tiny motors in electronics, you name it. Its parts are finding new life in autonomous vehicles and in other sensors. It stands to gain from 5G and is proactively positioning itself to advance the future development of electric-vehicle motors, too.
Xiaomi (XIACY) is a Chinese handset rival to Huawei. While it might yet find itself in the crosshairs of the U.S. government, for now it is capitalizing on Huawei's woes. Xiaomi's models are generally cheaper than Huawei, and certainly cheaper than Apple, which generates the greatest handset revenue in Asia off the lowest number of unit sales, compared with its top-5 Asian competitors. Xiaomi's cheaper handsets are perfectly positioned to take advantage of demand for 5G from middle-income mass markets in Asia.
Murata Manufacturing (MRAAY) rounds out the Top 5. It is a Japanese electronic-components manufacturer that specializes in ceramic parts. These are used in capacitors, sensors and radio-frequency filters, with the know-how to make thin-film and thick-film ceramics. Its forte are its multilayer ceramic capacitors, essential in mobile phones as well as medical devices and the energy industry. With its parts in 5G phones, home appliances and next-gen vehicles, it's positioned to take advantage of 5G innovation and the broader move to smart devices.
It is worth noting that the only stocks among the 22 companies in the basket that have posted positive earnings per share revisions this year are TSMC, the Taiwanese chipmaker Mediatek (MDTKF) , the Korean electronics conglomerate LG Electronics (KR:066570) and also its New York-listed subsidiary LG Display (LPL) . Even with all the market and consumer-goods mayhem, these companies are delivering increased profits. Impressive performance indeed.
