Accelerating 5G adoption
This year should see further investment in and deepening of 5G markets globally. 5G subscription uptake has been faster than 4G, with Ericsson forecasting 4.4bn 5G subscriptions globally by 2027, accounting for 49% of all mobile subscriptions.
This year should see further investment in and deepening of 5G markets globally.
However, regional variations in adoption will persist. China has been a key driver of 5G adoption and will accelerate 5G investment over the course of 2022, despite underwhelming 5G handset sales in the country in 2021. In the US, 5G commercialisation is moving at a rapid pace. US mobile network operators spent almost a $100bn buying mid-band spectrum to support 5G last year and are investing in supporting communications equipment. Europe has lagged in 5G adoption, but should accelerate in 2022. In other major markets like India, the allocation of spectrum bands for 5G is progressing.
Enabling sustainability
Despite the commitment of big cloud providers to renewable and emission targets, data centres consume over 3% of the world’s electricity and generate 2% of CO2 emissions, which is equivalent to the aviation industry. But as 5G enables new applications, connected devices and sophisticated computing architecture such as Edge computing, it fosters opportunities for cloud workloads to be decentralised, modernised, and become less energy intensive.
More broadly, emerging connectivity technologies can support a variety of sustainability goals. Energy and materials businesses can leverage Edge technologies to better understand emissions output, while transport businesses can use them to monitor idling vehicles in real time to cut emissions. Sensors in buildings can lead to more efficient energy use and allow remote control of energy and waste functions.
Engagement highlights
Recent events surrounding games company Activision has been a major source of concern to me. In November, there were more damning allegations against the company’s workplace culture, particularly that the CEO failed to act against sexual misconduct allegations for years. Engagement with the firm remains a priority. Despite the presence of value in Activision given its weak stock price performance, unless we see at the very least signs that the company will undertake a full independent review, I will likely exit the position.
We met with networking equipment vendor Juniper Networks in December. Our focus was on improving its board structure and its executive renumeration policy by linking compensation to ESG targets. But overall, Juniper is punching above its weight in sustainability terms compared to many other smaller US technology firms. The company’s recent paper on ethical AI shows it is relatively advanced in considering this important digital ethics topic.
Increasing investment from mega caps
Following two years of strong results adding to already-high levels of balance sheet cash, mega cap connectivity platforms are keen to invest in new initiatives. Meta (formerly Facebook) recently committed to spending $10bn on technologies supporting development of the metaverse. Other mega caps are likely to follow, although it will be sometime before the metaverse itself is an investable concept. Given the lead time developers need to produce applications, I would be surprised if Apple did not announce their intentions about a VR/AR product in 2022. Many mega caps have also just exited a period of tough comparables with 2020 results, which could be a tailwind for share prices in 2022.
Chinese connectivity stocks suffered last year given the regulatory scrutiny from the government, but I still view China as an area of opportunity. However, careful research is required to find stocks that are both promising from a growth and valuation standpoint, and have minimal regulatory risk.
Thematic positioning
I structure the future connectivity investment universe into three buckets: enablers, networks, and innovators.
I structure the future connectivity investment universe into three buckets: enablers, networks, and innovators.
In 2021, the fund was weighted towards enabler names in areas such as hardware and semiconductors to take advantage of the acceleration in 5G rollout and uptake. This year, I expect a slight shift towards innovators to be more exposed to second derivative plays on 5G and entertainment and ecommerce names, which are still long-term structural winners and, in many cases, facing easier comparables this year. However, these shifts between buckets are predicated on where I see opportunities from a bottom-up perspective.
I am continuing to also find promising network businesses. Bharti Airtel, which is the leading telco operator in India, should benefit from its strong competitive position, new digital initiatives such as Airtel Payments Bank, and problems facing rival operators. Given India’s population size, growing middle class, and relatively low digital penetration, it is a big opportunity for the future connectivity theme. In Europe, we could see more moves towards consolidation in the telco market, which could introduce attractive investment opportunities.