By Bill Studebaker, CIO & President, ROBO Global
These are certainly head-scratching times. Equities were as wild as the weather in the month of March. Early levels of optimism that followed Powell’s cautiously hawkish FOMC statement last week were quashed after he signaled the Fed’s willingness to pursue more aggressive tightening measures to restore price stability. In ‘normal’ times, one might expect these indicators to drive at least a mild sell-off across the broader global equities. Instead, investors have watched equities take a slow (if less than steady) climb back toward previous market highs.
Amid that landscape, our strategies performed as well as could be expected. The ROBO Global Healthcare Technology and Innovation ETF (NYSE: HTEC) declined slightly at -0.90%, the ROBO Global Robotics and Automation Index ETF (NYSE: ROBO) tripped to -2.57%, while the ROBO Global Artificial Intelligence ETF (TNYSE: THNQ) gained +1.53%1.
As we head into Q2, the dilemma for investors today is assessing what exactly is priced in by the market and which pockets could be vulnerable to further downside turbulence. Many of us are all too familiar with markets having a tendency to overshoot wondrously on the upside, only to deliver a painful slide back on the downside. We have also seen oversold conditions become a paradise for stock pickers looking to generate some serious alpha2 from single names swept up by broader selloffs. Happily, we believe today’s situation is handing investors a much-needed entry point into automation and healthcare innovation.
Looking at fundamentals, we’d highlight that inventory builds may hold the key to earnings and the economy going forward, at least for the foreseeable future. While the ‘Great Inventory Build’ that began in 4Q21 was great for the economy, the same cannot be said for many companies’ margins and earnings. A potentially massive dislocation between supply and demand could unhinge earnings for companies in nearly every industry. This is also true in robotics where demand is booming. In short, the world’s leading manufacturers of factory robots simply can’t keep up. Case in point: entering 2022, Fanuc, the Japan-based global leader in robots, CNC systems, and factory automation, was sitting on a record-high order backlog of nearly JPY 300B—more than double the level of orders in place at the start of the pandemic—and more than a full-year worth of sales.
As we head into earnings season, we expect orders at ROBO constituents such as Fanuc, Yaskawa, ABB, and Teradyne to continue to trend upward thanks to some drivers that remain firmly in place. The e-commerce boom is driving an insatiable demand for logistics automation solutions, including new areas of warehousing and distribution operations. At the same time, the rapid shift to electric vehicles (EVs) is pushing carmakers towards modular and flexible production systems that are very automation intensive, and increasing labor shortages are creating an urgent push for automation whenever and wherever it can create efficiencies that accelerate the supply chain.
We believe the ROBO ETF continues to be well-positioned to help investors benefit from the push for automation. Japanese companies (which as of 4/6/22 account for 20.62% of ROBO by weight), manufacture an impressive 45% of the world’s industrial robots3. The companies that supply the critical components for their end products—Harmonic Drive, Nabtesco, THK, SMC, and many more—are also holdings of ROBO. While meeting demand is likely to be an issue for all, these companies are delivering the automation needed to address the supply chain challenges that are prevalent everywhere. ROBO, HTEC, and THNQ are all designed to capture growth opportunities across the entire robotics, automation, and healthcare innovation supply chains. In this time of greatly anticipated demand, we hope this may indeed be ROBO’s golden hour.
1 Source: ROBO Global®, S&P CapitalIQ, For standardized performance data current to the most recent month end, please visit www.roboglobaletfs.com.
2 Alpha refers to excess returns earned on an investment above the benchmark return.
3 According to a recent report from the International Federation of Robotics (IFR)
The performance data quoted represents past performance and does not guarantee future results.
This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular.