Digital Infrastructure Monthly Report | January

Key Takeaways

• We continue to see Covid-19 related restrictions and supply chain issues putting some continued pressure on the overall global economy.[1] Still, we see this as a short-term phenomenon that should be a minor inconvenience for 5G, data centre, network infrastructure and other deployments. If anything, these problems and the rise of the omicron variant provide additional tailwinds for the strategy.
• The index advanced 3.25% in December and from an attribution perspective was driven by Digital Transmission, Digital Solutions & IP and Digital Connectivity sectors as these sectors contributed to approximately 117% of period returns.[2]
• Digital Solutions & IP name Silicon Motion Technology (SIMO-US) posted a 37.66% return on the company updating fourth quarter revenue growth and gross margin guidance to the upper end of the ranges announced in October.[3]
• Digital Connectivity names Broadcom (AVGO-US) and Marvell Technologies (MRVL-US) saw December returns of 20.18% and 22.93%, respectively on strong earnings releases.[2]
• The Coronavirus pandemic continues to accelerate the global economy’s embrace of technology, especially in education, remote work, communication, shopping, transacting, and data processing.[4]

Macro Outlook

The main driver of this strategy is the Virtuous Circle of capacity creating opportunity and opportunity, once seized, prompting the need for more capacity. As thematic investors, we break the economy into three components: consumers, corporations, and public policy. When we see consumers and corporations pulling in the same direction, we know we have a solid investing theme. When public policy joins them, setting performance thresholds or providing development incentives such as public works projects, all three are moving in the same direction, creating powerful thematic tailwinds, which is precisely what we see for digital infrastructure development.

Signals that the Virtuous Circle is alive and well include December announcements such as reports that the approaching metaverse will require 1,000 times current computing power[5], 5G capabilities will enable 6 billion Internet of Things (IoT) devices by 2026[6] and social media service TikTok enabling high definition (1080p) uploads as well as green screen capabilities for users. A U.S. Appeals Court upheld an April 2020 Federal Communication Commission (FCC) decision to make spectrum in the 6 gigahertz (GHz) band available for unlicensed use.[7] This opens the door for development what is known as Wi-Fi6 which not only matches the speeds of current 5GHz Wi-Fi but also has room for up to seven individual streams that can operate with interfering with each other.[8]

These and other announcements keep us optimistic that current supply chain woes and silicon shortages will be resolved in the coming quarters if only due to demand for hardware spurring further development. Now that the infrastructure bill has passed, we remain excited about this spending bill in that more bandwidth and storage only serve to spur the economy to develop uses for that new capacity, reinforcing the virtuous circle. This focus on the development of a nation’s digital infrastructure as vital to its future competitiveness is evident in many countries around the world, and as we look forward to emerging technologies such as AR/VR and the metaverse, it will only become more critical.