By Bill Studebaker, CIO & President, ROBO Global
Navigating an environment where good news turns to bad news and soft landings become ‘no landings’ (quicker than we can even take notes) feels like taking a test we haven’t studied for. It’s exhausting.
Even the teachers (the Federal Reserve) don’t seem to have the answers in hand! Recent manufacturing purchasing managers' index (PMI) prints in the US (47.8 vs. 47.1 cons), UK (49.2 vs. 47.5 cons), and Europe (52.3 vs. 50.6 cons) all point to the simple fact that the global economy remains far more resilient than most expected. Which begs the question: where do we go from here?
For context, the close of a rocky February spurred a flurry of discussion around the type of economic ‘landing’ in our future. A soft landing (the ideal) is one where recent rate hikes effectively slow the economy just enough to dampen demand and inflation—without deflating the GDP or increasing unemployment. A hard landing (which everyone wants to avoid!) is, of course, a full-blown recession and the unemployment numbers that go hand in hand with a tumbling economy. Then there’s the newest buzzword—‘no landing’—which is when, despite rate hikes and rising inflation, the economy continues to accelerate. Consumers keep shopping. Homebuyers keep buying. Companies keep hiring. The result: the plane never hits the ground. The economy keeps flying and, to rein it in, the Fed keeps hiking rates, creating one more conundrum for consumers and investors alike.
Looking at today’s rather bizarre economy, I have to wonder if the whole airplane metaphor is misguided. Maybe Captain Powell isn’t flying a plane, but rather a new sort of ship that can stay in the air far longer, flying us into uncharted territory. If we’re not on the brink of a global recession (which certainly seems to be the case), I think now is the time to lose the metaphors and focus on the fundamentals and facts.
Let’s start with the numbers. The month of February delivered a welcome dispersion of returns for the ROBO Global indices. The ROBO Global Artificial Intelligence ETF (THNQ) gained +1.59%, while the ROBO Global Robotics and Automation Index ETF (ROBO) pulled back -1.32%, and the ROBO Global Healthcare Technology and Innovation ETF (HTEC) declined -4.57%.1
Now for the details:
· #1: Automation is no longer a luxury.
As we have been reminding investors for years, in our opinion automation has become an absolute necessity. This fact was exacerbated by the pandemic which altered consumer habits, increased consumer expectations, and put pressure on companies to increase margins and accelerate their supply chains. The rate of adoption for automation has continued to accelerate. There are green shoots virtually everywhere, including in M&A which is always in play. Just one example: medical equipment maker Danaher (DHR) has expressed interest in taking over contract drug maker Catalent (CTLT), an HTEC portfolio company. While a deal isn’t imminent, Danaher’s overtures have valued the manufacturer at a significant premium, underscoring the urgency to automate. Across our constituents, we are seeing record levels of order backlogs and increased momentum—despite the fear of recession and a rocky stock market.
· #2: China's manufacturing activity and automation adoption is expanding.
The official manufacturing purchasing managers’ index released on Wednesday showed that China’s manufacturing activity in February expanded at the fastest pace in more than a decade. The expansion smashed expectations, with production zooming after the lifting of COVID-19 restrictions late last year. China surpassed the US in robot density for the first time in 2022[i]—a key indicator of the country’s automation adoption in the manufacturing industry. At the same time, PMI shot up to 52.6 from 50.1 in January[ii], surpassing the 50-point mark that separates activity expansion and contraction. The PMI far exceeded an analyst forecast of 50.5 and was the highest reading since April 2012.
· #3: The White House is pushing for automation of US ports.
Labor unions have rallied against automation adoption for decades, but it seems a tipping point may have finally arrived. The use of port automation has been a key sticking point in the negotiations between the International Longshore and Warehouse Union (ILWU) and the Pacific Maritime Association (PMA), and that resistance has slowed adoption at a point in the supply chain that needs it most: the ports. That may change quickly following comments by White House supply-chain envoy Stephen Lyons at the TPM23 Conference in Long Beach who stated that “the US ports and logistics industry needs to embrace automation in order to improve efficiency.” Speaking at the TPM23 Conference, Lyons stressed that automation was “inevitable” and that the industry should “move there deliberately as opposed to getting dragged.”
I could go on, but I’ve made my point. Whether Captain Powell steers us to a soft landing, a hard landing, or no landing at all, we believe automation is vital to the success of the global companies that will ultimately drive the economy forward. If you’re an investor who wants to ensure a graceful landing of your own ‘plane’ in the years to come, investing in robotics, automation, and healthcare technologies may just be the perfect ‘landing gear’ to have on board.
[i] According to the World Robotics 2022 report, presented by the International Federation of Robotics (IFR)
[ii] According to China's National Bureau of Statistics
ROBO Top Ten Holdings, HTEC Top Ten Holdings, THNQ Top Ten Holdings
1 Source: ROBO Global®, S&P CapitalIQ, For standardized performance data current to the most recent month end, please visit www.roboglobaletfs.com.
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