In today’s Exponential Investor

  • New battle lines in the 5G wars
  • If renewables are the future, why are green energy stocks falling?
  • Dangerous optimism amid record market highs last week

The global battle for 5G supremacy may have entered a new phase over the last month…

In a blow to China’s Huawei, Vodafone UK has chosen Samsung to supply its 5G infrastructure, as Vodafone extends 5G coverage to 2,500 rural sites in Southwest England and Wales.

That news came on the heels of India banishing Huawei from its 5G trials. For good measure, India also blocked the Chinese firm ZTE, while allowing Nokia, Samsung, and Ericsson to begin six-month trials for a 5G rollout.

This shutout effectively closes Huawei off from the world’s second-largest market of mobile phone users – though the first is, of course, China itself.

Why this matters to your money: companies involved in the 5G rollout have performed strongly year to date, with the BlueStar 5G Communications Index (a basket of 77 5G-related firms) up over 14% since January. That’s roughly in keeping with performance over the last five years, in which the index has returned 117%. But as the 5G revolution enters its final stage of the rollout, gains could be accelerated.

History also shows there are considerable economic benefits that could spill into numerous other industries…

Nobody called it “1G” at first. The network with just voice call capabilities only got its name after 2G came along. But 1G, launched by Nippon Telegraph and Telephone in 1979, would take just five years to reach nationwide coverage in Japan.

It wasn’t much of a revolution in itself. There was no encryption between calls, so anyone with a radio scanner could listen in. Calls had no roaming support, which made the technology non-viable for many businesses. But 1G did enable the first commercially available mobile phone, produced by Motorola – the DynaTAC.

Japan “won” the first “G” race, but the technology was minimally disruptive. The same couldn’t be said of the “2G” race beginning in the early 1990s.

The 2G era, lasting roughly from 1991 to 2000, belonged to Europe. By December 1994, Germany had 71% 2G penetration, while the United States was at 0.1%. And while the United States would reach 86% penetration by 2001, Germany reached 100% a year before that, while other European countries arrived at substantial adoption levels as well.

This time, there was a serious economic windfall to be had from first place in 2G supremacy. As Recon Analytics puts it:

2G leadership imparted significant economic benefits to Europe. European consumers and companies, like Nokia and Ericsson, reaped the benefits of technology leadership because they had the most advanced networks supporting the most advanced devices at an earlier date. This meant that technologies often would be developed and rolled out in Europe well in advance of release in the US or elsewhere.

European companies that orchestrated the revolution saw enormous gains. Nokia, for instance, grew to be Europe’s biggest mobile phone supplier. Its exports accounted for 24% of Finnish goods and services by 2000.

Naturally, Nokia’s stock soared more than 30-fold from 1996 to the early 2000s. Its market cap grew to account for 70% of the value of the Helsinki Stock Exchange. Incredibly, the company had to be removed from the exchange because the Finnish stock market would otherwise reflect the performance of Nokia, rather than Finland’s economy as a whole.

Those are the kinds of gains that are possible when a company harnesses a “G” revolution.

We saw it again in the 3G race, when Japan launched three 3G networks from October 2001 to December 2002, while European bureaucrats squandered the continent’s head start. They forced an auction to deploy 3G services, rather than repurpose existing 2G networks.

The result was Japan reaching 50% 3G penetration by 2007, while Germany lagged at 12%, Italy at 25%, and the United States at just 3.5%. By 2011 the United States reached 82% 3G penetration, but Japan still led the way at 99%.

Japan’s i-mode technology (created in the last gasp of the 2G era) gave Japanese carriers a business incentive to invest in 3G networks. Essentially, i-mode technology made it easy for businesses and consumers to settle transactions electronically online, and i-mode developers collected $9 billion in 2007 and $12.8 billion in 2008 while making Japan’s economy more efficient overall.

But the 4G era would belong to the United States, with US mobile operators investing $117 billion into networks while regulators bid adieu to some of the biggest stumbling blocks to a rapid 4G rollout.

The result was foreigners wresting control from Japanese companies, with the Android alone taking 53.7% of the market in 2012. (Japan’s Symbian operating OS had held 50.3% share just three years before.) Some key US companies that engineered the coup were rewarded in market share: Apple came to dominate the smartphone market even in Japan, commanding nearly 70% of the market in 2017. Its expanded international presence since 2012 coincided with more than 100% stock returns in that time.

The 4G revolution brought the biggest spoils yet. According to CTIA (representing the US telecommunications industry) the 4G revolution grew the US wireless industry by 253% from 2011 to 2019, to $690.5 billion. Millions of new jobs were created, while wireless services got cheaper and faster. Recon Analytics puts the overall 4G benefit to the US economy at $445 billion in realised GDP by 2016 – and that was only in the early years of the 4G era.

Here at Southbank Investment Research, we’ll continue to watch the 5G rollout closely as it approaches its final months, with a potential $13.1 trillion bonanza of new industry wealth creation at stake.

If green energy is the future, why are green energy stocks falling?

Goldman Sachs says the clean energy future is already here.

Deloitte says green energy growth and decarbonisation may accelerate in 2021, thanks in part to $2 trillion from Joe Biden’s administration and the commercialisation of advanced battery technologies.

And last January, five experts joined a panel in Forbes to point to new momentum for the clean energy industry, touching everything from energy storage to a “breakout year” for building electrification.

And these are just a few examples of analysts rhapsodising over the breakneck pace of the unfolding green revolution.

And yet… clean energy stocks have seen a sharp selloff in recent months that’s affected everything from electric vehicle companies, to fuel cell firms, to photovoltaic panel industry leaders.

You can see the industry-wide selloff in ETFs like iShares Global Clean Energy ETF (ICLN), down over 20% from the start of the year (after multiplying in value during the last months of 2020).

Source: Yahoo

If you’ve watched the enormous run-up in renewables over the last year, and thought about getting in, you may be having second thoughts…

Or if you recently took the plunge and got into green energy companies, this recent market action is probably unnerving.

Or maybe you sense a glistening opportunity – an entry point into renewables at prices you wish you’d got in at months ago, before a new run higher.

Here at Southbank Investment Research, we believe the trend towards green energy is just beginning (in particular, our top renewables expert James Allen is eyeing government-mandated transitions to renewables with trillions of dollars backing them in the EU, US, China, and elsewhere).

After a furious run-up like we saw in 2020, it’s natural for clean energy to take a breather (internet companies did the same thing in 1997, in a blip almost no one remembers before a multi-year march higher.) I suspect the same pattern is playing out with renewables.

Dangerous market optimism amid record highs

Another week, a few more market highs – this time in the Nasdaq and S&P 500.

The CBOE Volatility Index (VIX) measures both volatility in markets on the upside and downside. Nonetheless, it’s known as the “fear gauge” for spiking during downturns and mounting trader worries.

Having fallen 11% last Friday, it’s now showing levels of complacency we haven’t seen since November 2019.

Of course, markets might have continued their march higher after November 2019, if not for a once-in-a-century Black Swan event like the pandemic. All the same, it’s worth remembering how fragile markets can be in times like these.

Some of the savviest investors in the world are also sounding alarms…

British billionaire Jeremy Grantham is warning of a summer collapse rivalling that of 1929.

Billionaire Leon Cooperman recently said of the stock market, “this will not end well” and predicted it would be lower a year from now.

“Bond king” Jeffrey Gundlach says stocks will suffer “a dramatic and painful decline.”

Billionaire investor David Tepper publicly begged views on CNBC to exercise caution in markets.

Billionaire retail investor Barry Sternlicht compared markets to the 1999 bubble in January.

And Warren Buffett’s partner at Berkshire Hathaway, fellow billionaire Charlie Munger, has said investors in December were “very near the edge of playing with fire.”

With so many billionaires sounding the alarm, it is a timely reminder for investors to remain clear-headed and to see through the market manias, irrational exuberance and bubbles.

Until next time,

William Dahl
Editor, Southbank Investment Research