Are these smart city stocks smart plays

Palo Alto Networks, Panasonic and Nokia are set to benefit from the rise of smart cities, which demand from increasingly sophisticated data management. Companies like Cambridge start-up Alchera Technologies and global conglomerate Schneider Electric are among the pioneers in the field.

• Smart cities set to be a $6.8trn industry by 2032.
• Schneider Electric adds Microgrid Flex to its EcoStruxure suite.
• How to invest in smart cities: the Lyxor MSCI Smart Cities ESG Filtered (DR) UCITS ETF offers exposure to stocks within smart cities. The fund is up 14.5% in the past six months.

From Neom, Saudi Arabia’s hyper-connected cognitive city project, to the Ellinikon, a technological renovation of the Athenian seafront, the cities of the future — and, indeed, the present — are driven by vast amounts of data and cutting-edge tech.

“‘Smart cities’ has become a catchall term to describe the more pervasive use of technology within our built urban environments,” Anna Jordan, co-founder and CEO of Alchera Technologies, told Opto. “This can extend from an Internet of Things-connected ‘smart bin’ or a real-time bus arrival sign at a bus stop, all the way to artificial intelligence-powered traffic signal timings.”

Besides IoT and AI, a broad array of technological sub-themes feed into the overarching smart cities theme, especially drone and autonomous vehicle technology, telecoms and cybersecurity. There is also considerable overlap with infrastructure spending, and related topics such as low-carbon energy generation.

Palo Alto Networks [PANW], a leading provider of IoT for smart cities, defines several distinct use cases, from transport solutions such as smart public transport, smart parking or smart traffic controls, through to smart waste management and environmental protections.

The global market for smart city technology alone is expected to clear the $300bn mark by 2032, according to Guidehouse Insights. Worth approximately $121bn in 2023, this gives the industry a CAGR of 10.7% over nearly a decade.

According to Market.us, the global smart city market as a whole will grow from $880bn in 2023 to $6.78trn by 2032, at a CAGR of 23.3% during that period.

According to some estimates, Neom alone could cost almost half that amount. The city, which lies at the heart of Saudi Arabia’s Vision 2030 plan, has a budget of $500bn, with futuristic elements ranging from flying taxis to a floating industrial complex.

Directing traffic

Part of the value-add of smart cities, according to Jordan, “lies with the more effective and efficient use of data, to make better ‘right-sized’ decisions about transport infrastructure operation”.

For example, Alpha, Alchera’s flagship software platform, “collects, analyses and fuses data in real-time from existing sensors within the transport network”, enabling key stakeholders to make better-informed decisions about transport infrastructure and traffic management.

Such initiatives are premised on a close collaboration between private organisations and public bodies. In May, Panasonic [6752.T] was among 14 organisations that received approval from the US Federal Communications Commission to develop connected vehicle applications. The programme will allow the company to use radio spectrum for connecting vehicles, under a pilot scheme run by Panasonic’s Smart Mobility office and three US states, where it has deployed the trial in partnership with their respective transport departments.

For example, in its partnership with the Colorado Department of Transportation, Panasonic’s sensors are positioned at intersections, where they give transit vehicles priority, or clear traffic for emergency vehicles.

The smart transportation market is certainly a sizeable chunk of the smart cities theme; Grand View Research estimates the sub-theme will be worth $285.12bn by 2030, growing at a 13% CAGR until then.

Schneider electrifies the smart grid

Schneider Electric’s [SU.PA] EcoStruxure suite is one of the most comprehensive product offerings for connected technologies, and is described by the company as an “IoT-enabled, plug-and-play, open, interoperable architecture and platform” for “homes, buildings, data centres, infrastructure and industries”.

In May, Schneider added EcoStruxure Microgrid Flex to the range. Microgrids are semi-independent entities within the grid, which can be turned on or off with the aid of smart grid technology, providing power during outages and improving the grid’s reliability. Powered by renewable energy, Microgrid Flex “accelerates decarbonisation”, according to Schneider Electric North America CEO Annette Clayton.

Schneider’s EcoStruxure industrial software is one of the products that could help smart city technology disrupt the insurance world. Schneider has a long-standing partnership with insurer HDI Global SE to use the data acquired through smart connectivity platforms to underwrite industrial insurance, and announced a similar agreement with HSB, a subsidiary of Munich Re [MUV2.DE], in late 2022.

Driving efficiencies

“Cities are trying to do ‘more for less’, at the same time that the general public’s expectation of transport quality increases, and the pressures of a climate crisis and key policy commitments loom large,” Jordan tells Opto.

While this is on one level a tailwind for the industry, it puts pressure on businesses operating in the space to provide a clear value-add, either in the form of reduced costs or efficiency gains.

These efficiency gains can take various forms. For example, data on electric vehicle (EV) charge point usage from Zapmap has been used by the Green Finance Institute to assess patterns of charge point usage in the UK, highlighting two distinct styles of charging behaviour.

Data like this can be used to inform planning at the local level by enabling local authorities to ensure that “the right charging provision is installed in the right places”, according to Melanie Shufflebotham, co-founder and chief operating officer of Zapmap.

Nokia: from smartphones to smart cities

The pace of technological change is rapid — and, as Jordan points out, it is now faster than the pace at which the public bodies responsible for managing cities can operate.

“Technology has overtaken uptake in the smart city sector”, particularly in the UK, she says. However, uptake will accelerate over time, especially as the underlying technology — for example the way in which massive amounts of data are gathered, curated and shared — matures.

However, emerging markets are embracing the potential of smart cities enthusiastically. South Korea is home to Songdo, the “world’s first smart city”, according to the Guardian. Nokia [NOK], meanwhile, signed a deal in March for its AVA technology to underpin the construction of Egypt’s new smart capital city.

How to invest in smart cities stocks

ETFs, or exchange-traded funds, offer an economical and diversified way to invest in a variety of stocks within a particular theme.

Fund in focus: the Lyxor MSCI Smart Cities ESG Filtered (DR) UCITS ETF

The Lyxor MSCI Smart Cities ESG Filtered (DR) UCITS ETF [IQCT.L] tracks the MSCI ACWI IMI Smart Cities ESG Filtered Net Total Return Index, an index of companies working within IoT, smart buildings, smart homes, smart safety and security, smart mobility, smart waste, water management, smart energy and grids.

As of 4 July, companies operating within the information technology (IT) sector account for 44.60% of total fund assets, industrials account for 44.58%, communications services 5.07%, utilities 4.99%, energy 0.51% and materials 0.25%.

Its holdings, as of 4 July, include Schneider Electric and Palo Alto Networks. IQCT has gained 14.5% in the past six months.

The iShares Smart City Infrastructure UCITS ETF [CITY.MI] tracks the STOXX Global Smart City Infrastructure (USD) index. As of 4 July, companies operating within the industrials sector account for 48.92% of total fund assets, IT accounts for 37.17%, communication 3.98%, real estate 3.24%, materials 3.00%, consumer discretionary 2.89%, utilities 0.31% and healthcare 0.19%.

Its holdings include Palo Alto Networks and Nokia. In the past six months, CITY has gained 9.4%.