Even with an ongoing trade war between the world’s two biggest economies and a weak domestic market, some Japanese investors are saying go long on next-generation technology stocks.
Sumitomo Mitsui Trust Asset Management Co.’s Next Generation Connectivity Fund has seen its total net assets surge more than 40% in five months to 374.6 billion yen ($3.5 billion) as of Aug. 30. The fund, nicknamed “The 5G,” has returned 19% this year, beating 96% of its peers. While it invests primarily in U.S. companies such as Altice USA Inc., Kyoto-based Murata Manufacturing Co. has the 10th-largest weighing at 2.9%.
Analysts have long touted 5G, which promises transmission speeds that are 100 times faster and reduce lag to milliseconds, as a ripe target for equity investment. While some related stocks have already seen big gains, 5G will be “an attractive investment area for a long time,” according to Hirochika Oono, executive officer for business development at Sumitomo Mitsui Trust AM.
Japan’s major mobile carriers are expected to start commercial 5G services in spring 2020, with applications of the technology to be showcased during the Tokyo Summer Olympics. Nomura said in a June report that it expects “steady capex going forward.” NTT Docomo Inc. said last October that its plans to invest 1 trillion yen in related infrastructure over five years.
Wagers on where those funds are going have been a rare bright spot for the Topix index, which is one of the worst-performing developed stock markets in 2019. Demand related to 5G has helped Lasertec Corp. more than double its share price this year, ranking it No. 4 on Japan’s benchmark gauge. The benefits have yet to kick in for other 5G-related names — Murata is down 9.6% for this year. It rose as much as 1.8% on Wednesday.
To Katsuyoshi Sakase, a general manager of equity research department at Aizawa Securities Co., the 5G rally is only just beginning. The shares aren’t expensive, as the ongoing trade war between the U.S. and China, plus restrictions on Huawei Technologies Co., the world’s largest network equipment maker, have helped cap gains, he said.
“We’re going to see who’s earning money because of 5G,” and that will attract stock investors, said Sakase. He pointed at Advantest Corp., which has climbed over 20% since posting better-than-expected earnings for its fiscal first quarter on July 24. The company cited strong demand for 5G-related semiconductor testers for its results, and Goldman Sachs Group Inc. said it’s now likely to beat full-year guidance.
Analysts say that demand for testing equipment will be followed by network systems and equipment, electronic materials, base station construction and then mobile services. Eventually producers of games as well as other entertainment and services will reap gains from the new technology.
“Many Japanese materials producers have a large share of the global market for materials and optical transmission components related to 5G base stations,” the Nomura analysts wrote. Their picks include stocks from household names like Panasonic Corp. to industrial players such as Disco Corp.
Though the overall market outlook is still clouded by global trade frictions, now is a good time to invest in 5G stocks, according to Aizawa’s Sakase. While it may be difficult to pick stocks at this stage, he noted there’s potential in a broad array of fields, including health care.
“We will start to see new services that weren’t available with 4G networks,” Sakase said. “There will be new winners.”