(02 January 2020)DAILY MARKET BRIEF 2:What does 5G mean for investors?

With 5G still in the early days, the next decade should provide both opportunities and risks to investors as 5G adoption increases sharply. Winners will likely be direct and indirect beneficiaries of increased 5G spending and the resulting new business opportunities created by 5G, whereas losers may be telecom operators and legacy business models that fail to adopt their business models to the coming 5G era.

The direct beneficiaries are mainly the technology telecom sectors, including 5G equipment makers, smartphone vendors and their component suppliers. With a solid 5G pipeline for 2020, we see interesting near-term growth opportunities in the smartphone supply chain. And as 5G capex gradually broadens out, we see medium-term opportunities in the 5G equipment supply chain. While the rising tide should lift most companies in both supply chains, we think those with better margin profiles and sustainable growth opportunities will be the eventual winners.

Telecom operators that can exhibit pricing power and are in a better position to offer wider 5G services to multiple industries should stand out as winners as well, unlike those burdened by increased capex intensity and/or those with limited product offerings. The prospects for tower companies are mixed. Rising capex intensity would favor larger telcos, which in turn would reduce tenancy ratios for tower companies. Potential diversification of tower companies into valued-added solutions, like fiber build outs or small cells, may offset some of the risks, however.

Indirect beneficiaries include companies in other sectors that can take advantage of 5G’s superior technology and provide new products and services. These include internet platform companies that can further disrupt traditional business models, or enterprises that successfully adapt their business models and expand into new growth segments like smart mobility, smart health, smart cities or smart entertainment.

Meanwhile, telecom operators that fall behind in 5G are at a risk of further market share losses and deteriorating fundamentals due to a lack of pricing power. Also, traditional business models that fail to adapt and do not invest in the right digital technologies are at risk given 5G’s impact on the pace of disruption.

By UBS