Ahead of the Curve: Time to embrace robots?
Robotics and automation are no longer sci-fi, they are a fast-growing and profitable sector, say Johan Van Der Biest and Rudi Van den Eynde
The technology sector is evolving rapidly as unprecedented computing power is harnessed in artificial intelligence (AI). AI will enable robots to act autonomously, giving them the ability to learn, reason and recognise emotions, pictures, languages and maps. While advanced robots continue to revolutionise manufacturing, now they are set to change the way we live our daily lives.
Just as in previous industrial and technological revolutions, huge wealth will be created. The question for investors is how to tap this wealth.
Considerable value has already been created in robotics. This value can lie in large companies – such as Google, Facebook and IBM – where the robotics opportunity might be harder for investors to spot. It is also found in smaller, innovative companies, which can offer a pure-play route for investors to the growing industry. Opportunities also exist in familiar brands, which have refocused or reinvented themselves to become automation specialists.
These types of companies have outperformed over the last decade, returning more than 200% to investors, while the MSCI World index has barely moved over the same period.
However, not all companies in this nascent sector are worthy of investment. Investors may well ask whether automation and robotics are the latest incarnation of the high-tech boom of the late 1990s when some companies went on to become blockbuster brands while others are long forgotten.
An important metric when assessing a company is market share. Companies with stagnant or falling market share can no longer be classified as fast-growing and may have peaked in terms of their ability to disrupt the market. Investors in Nokia will be acutely aware of this, while there is some debate over whether some leading social media and technology brands can maintain their exalted positions.
There is a large and growing number of stable, publicly-listed companies with market capitalisations of at least $250m (€224m). Investing in these companies lowers portfolio volatility compared with taking stakes in smaller companies or start-ups.
While there are companies specialising in automation across the globe, Asia and Europe punch above their weight. In particular, South Korea, Japan and Germany are far ahead in the use of industrial robots. Japan has long excelled in this area, partly as a way to support its huge manufacturing base, but recently it has looked to robots to support its rapidly-ageing population. There are fewer companies specialising in automation in China, mainly because labour has been cheap. But as China’s demographics shift and wages rise, it too is likely to join the automation revolution.
After a decade of outperformance, it is reasonable to ask whether returns are sustainable. Current valuations appear reasonable, with average price-earnings ratios at about 20. This is higher than the S&P 500, which contains mature companies, but is considerably lower than for companies during the high-tech boom, when price-earnings ratios for some stocks soared above 200. Moreover, many of the considered companies have a proven track record and have been profitable for several years in a row. So the fundamentals appear sound.
At a thematic level, the trend towards automation is only just beginning and it is hard to imagine that well-selected companies will not deliver strong topline and bottom-line growth over the longer term. The industry is entering a phase where several radical technologies are moving from design to implementation – autonomous vehicles, personal service machines and robots operating alongside humans in the workplace.
Any investor in this strategy needs to have a strong buy and sell discipline, with decisions based on rigorous fundamental analysis and durable trends, rather than on sentiment.
Gaining exposure to the secular growth theme of robotics and automation is not a bet on a sci-fi future. Value and wealth have been created for years and this is likely to become mainstream in the coming years as the ‘fourth industrial revolution’ becomes a significant driver of the global economy.
Like many emerging sectors, this one may experience short-term volatility, but the ongoing development of revolutionary products should ensure that longer-term gains are substantial.
Johan Van Der Biest is a senior fund manager and Rudi Van den Eynde is head of thematic global equity at Candriam Investors Group