Robotics and Automation
A Disruptive Influence?
Will robots take your job? Hardly a day goes by without another headline grabbing article on how automation and robotics are altering the way in which businesses operate with resultant large scale industry change. As firms strive to deliver ‘earnings growth’ or ‘margin expansion’ and consumers seek ever cheaper products, delivered seamlessly at the click of a button via a global 24 hour market place, automation and robotics are at the centre of what one could legitimately describe as the ‘fourth industrial revolution’. Automation and robotics look set to power this progress combining innovation in industrial IT processes and delivering global manufacturing productivity gains.
Industry change and business disruption are not new however, over time there have been numerous examples of how changing industry dynamics have led to the rapid or gradual downfall of many businesses. It is hard to analyse whether these changes are accelerating in recent years, but it does feel that many companies are undergoing intense competition to their business models driven by disruptive change and we may be entering a more intense phase of the long cycle of evolution.
With a broadly supportive global trade environment, as the chart below highlights, factory automation spending is on a clear uptrend in the world manufacturing hubs, with order growth at the top three suppliers of industrial robots accelerating.
Source: CPB World Trade Monitor – data to 30.06.17
This growth has not gone unnoticed by investors, and automation stocks are trading at lofty valuations. The raft of fund launches offering investors access to the theme, could be a warning sign that the market may have become too optimistic on the opportunity set. Furthermore, management have been increasingly quoting ‘big data’ or ‘AI business’ as rationale for expansion or acquisition as they know that this is a good story to tell the market.
Notwithstanding these concerns there is clearly a structural growth story to exploit with promising long term drivers and the Waverton Managed Portfolio Service team chose to invest in the ETFS ROBO Global Automation and Robotics Exchange Traded Fund (ETF) as the most effective way to gain exposure to the theme. ROBO Global, the company who created the index the ETF tracks, was founded in 2013, with the specific purpose of providing investors with access to this structural growth story and to benefit from the industry tailwinds building for the sector. Clearly, this is not a new phenomenon and as the chart below demonstrates, automation stocks have delivered impressive returns.
Source: MSCI, ROBO Global, Bloomberg, Waverton Investment Management. Data to 25.08.17
Yet the structural growth story remains attractive for many companies held within the ROBO ETF, which has just posted the strongest earnings per share (EPS) growth since 2011, with the second quarter 2017 median EPS growth up over 24% year on year. Within electronics, a major investment cycle is unfolding around OLED technology, combined within ongoing smartphone assembly and Lithium Battery production. While in China CLSA believe automation capex, ‘could be on the brink of a new super cycle’. Advancements in logistics and healthcare robotics, coupled with artificial intelligence, clearly demonstrate the hugely exciting opportunities within the space.
The fundamental impact of these changes and evolution of business practice could take many years to unfold, but the competitive disruption this presents provides a very compelling investment case for a diversified portfolio of robotics and automation companies.
By Luke Hyde-Smith
Head of Third Party Fund Selection
The views and opinions expressed are the views of Waverton Investment Management Limited and are subject to change based on market and other conditions. The information provided does not constitute investment advice and it should not be relied on as such. All material(s) have been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy of, nor liability for, decisions based on such information.
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Past performance is no guarantee of future results and the value of such investments and their strategies may fall as well as rise. Capital security is not guaranteed
 ROBO Global – Summer Earnings Investment Commentary, August 17, p1
 Organic light-emitting diode
 CLSA – Greed & Fear – Schizoid data, July 17, p12