Geopolitical and trade tensions may fragment the 5G supply chain, but while that could make the theme more complex to navigate, it is unlikely to diminish its importance.

Today’s CIO Weekly Perspectives comes from guest contributor Yan Taw (YT) Boon.

You can tell 5G connectivity is a major emerging theme in our economy and our culture by the way it continues to cut through the unusually crowded news agenda.

Take the COVID-19 crisis. Industry used to tell us that working from home, connected entertainment and remote health care applications would start to take off once 5G was in place. But now demand for these applications has exploded, and trying to use them on inadequate, cumbersome 4G connections has increased the urgency of the 5G rollout.

At the same time, geopolitical and trade tensions have revived between China and the U.S., and sensitivities around the role of Huawei, the Chinese firm that is one of the world’s leading providers of 5G infrastructure, have again been at the forefront.

When 5G is associated with trends that are so bullish on the one hand, and yet so bearish on the other, what conclusion should we draw?

Reliance

In the past month, Huawei’s chief financial officer, Meng Wanzhou, has lost her bid to avoid extradition from Canada to the U.S., where she faces allegations of fraud and sanction violations. The U.S. government has doubled down on its efforts to cut Huawei off from its component suppliers worldwide, requiring non-U.S. companies to get a license to use U.S. technology or software in components made for Huawei.

Huawei has been preparing for this environment for some time, however.

Meng was first arrested more than 18 months ago, and it has already been a year since the U.S. required its homegrown 5G player, Qualcomm, to get a license to supply Huawei. As such, Huawei has already reduced its reliance on Qualcomm chips by designing its own, at its subsidiary HiSilicon, to be manufactured by Asian chipmakers such as Taiwan Semiconductor Manufacturing Co.

While that trade could be threatened by the new U.S. export controls, Huawei has also deepened its relationships with other Chinese chip makers and developers, such as MediaTek and Unisoc. Few doubt that the quality of 5G chips from MediaTek, in particular, are a match for their international competitors’.

‘5G Alliance’

Nonetheless, elsewhere in the world there are concerns about China’s chip-manufacturing capacity—and, of course, the increasing geopolitical and security sensitivities of relying too heavily on Huawei for 5G infrastructure.

These concerns are most pronounced in the U.K. and Europe, where integrated mobile technology is advanced. That is why the U.K. recently announced a new security review of Huawei’s role in 5G and floated the idea of a “5G alliance of democracies” to help diversify away from Chinese technology.

This potentially takes us away from the simple supply chain in which Huawei dominated 5G infrastructure worldwide and Qualcomm dominated chip manufacturing, toward something much more bifurcated or fragmented.

Huawei is likely to continue to take the lead on 5G infrastructure in China. But these developments open up a clearer opportunity for Nokia and Ericsson in Europe, and for Samsung, potentially also in Europe and the U.S., but most likely in India and the rest of Asia.

Among chip designers and manufacturers, the domestic Chinese companies are likely to continue to capitalize on Qualcomm’s enforced retreat, while we think the Asian firms are likely to swallow the extra paperwork and remain suppliers to Huawei. The latter may also supply more to the companies stepping into the Huawei-shaped hole in European 5G infrastructure.

Iron Curtain

If all of that seems complicated, remember that it really just brings 5G in line with the iron curtain that bifurcates the rest of our digital world, with Google, Facebook, WhatsApp and Amazon on one side and Baidu, Tencent’s WeChat and Alibaba on the other.

Just as this bifurcation doesn’t make the internet, social media or ecommerce any less critical for the modern economy, neither is a supply-chain bifurcation likely to disrupt the adoption of 5G as it becomes similarly critical.

What it will do, however, is make the 5G investment theme more complex, diverse and dynamic. In our view, that also makes it much more difficult to invest in passively. We believe 5G connectivity will change many aspects of our lives—but active management and deep sector knowledge and experience is likely to be required to get the best investment returns from it.

In Case You Missed It

  • Japan 1Q 2020 GDP (Final): -2.2% (QoQ, annualized)
  • Eurozone 1Q 2020 GDP (Final): -3.6% (QoQ)
  • China Consumer Price Index: +2.4% in May (YoY)
  • U.S. Consumer Price Index: -0.1% in May (MoM) and +0.1% (YoY); core CPI decreased 0.1% (month-over-month) and increased 1.2% (YoY)
  • Federal Open Market Committee Decision: The FOMC made no changes to its policy stance
  • U.S. Initial Jobless Claims: +1.5 million in the week ending June 6
  • U.S. Producer Price Index: +0.4% in May (MoM) and -0.8% (YoY)

What to Watch For

  • Monday, June 15:
    • Bank of Japan Policy Rate Decision
  • Tuesday, June 16:
    • U.S. Retail Sales
    • NAHB Housing Market Index
  • Wednesday, June 17:
    • Eurozone Consumer Price Index
    • U.S. Housing Starts & Building Permits
  • Thursday, June 18:
    • U.S. Initial Jobless Claims
    • Japan Consumer Price Index

Statistics on the Current State of the Market – as of June 12, 2020

Market Index WTD MTD YTD
Equity      
S&P 500 Index -4.7% 0.0% -5.0%
Russell 1000 Index -4.8% 0.1% -4.8%
Russell 1000 Growth Index -3.0% 0.1% 5.4%
Russell 1000 Value Index -7.0% 0.0% -15.7%
Russell 2000 Index -7.9% -0.4% -16.3%
MSCI World Index -4.5% 0.9% -7.2%
MSCI EAFE Index -4.2% 2.6% -11.8%
MSCI Emerging Markets Index -1.5% 6.2% -10.6%
STOXX Europe 600 -6.2% 2.2% -13.6%
FTSE 100 Index -5.8% 0.6% -17.8%
TOPIX -2.6% 0.4% -7.6%
CSI 300 Index 0.2% 3.8% -1.7%
Fixed Income & Currency      
Citigroup 2-Year Treasury Index 0.0% 0.0% 2.8%
Citigroup 10-Year Treasury Index 2.0% -0.5% 11.9%
Bloomberg Barclays Municipal Bond Index 0.6% 0.6% 1.8%
Bloomberg Barclays US Aggregate Bond Index 0.7% 0.2% 5.7%
Bloomberg Barclays Global Aggregate Index 0.7% 0.8% 2.8%
S&P/LSTA U.S. Leveraged Loan 100 Index -0.2% 1.4% -2.4%
ICE BofAML U.S. High Yield Index -1.5% 1.8% -4.0%
ICE BofAML Global High Yield Index -1.3% 2.2% -3.9%
JP Morgan EMBI Global Diversified Index 0.0% 2.4% -3.8%
JP Morgan GBI-EM Global Diversified Index -1.4% 1.6% -5.9%
U.S. Dollar per British Pounds -1.5% 1.4% -5.3%
U.S. Dollar per Euro -0.6% 1.1% 0.2%
U.S. Dollar per Japanese Yen 2.3% 0.4% 1.3%
Real & Alternative Assets      
Alerian MLP Index -12.3% -0.6% -30.7%
FTSE EPRA/NAREIT North America Index -5.4% 6.4% -18.7%
FTSE EPRA/NAREIT Global Index -4.3% 6.0% -18.9%
Bloomberg Commodity Index -1.5% 0.3% -21.0%
Gold (NYM $/ozt) Continuous Future 3.4% -0.7% 14.2%
Crude Oil WTI (NYM $/bbl) Continuous Future -8.1% 2.4% -40.5%

Source: FactSet, Neuberger Berman.