The ETF Securities Partner Series joins with Australian and international investment professionals to discuss the big issues of the day and what these mean for investors.
Robotics, automation and artificial intelligence (AI) have rapidly advanced in recent years as humans look for more efficient and better ways to manage a range of activities. As the COVID-19 pandemic has forced us to rely more on technology than we ever have before, in many ways this crisis has been a benefit for this sector.
ETF Securities spoke to Jeremie Capron, Director of Research for ROBO Global, on how robotics and AI have been affected during the pandemic and the prospects of the ROBO Global Index going forward.
The COVID-19 era of uncertainty
The pandemic has affected all areas of investment markets, with uncertainty and lockdowns reflected in market volatility. Most sectors offered negative performance for the quarter ending March 2020, but it is interesting to note that the ROBO Global Index was able to outperform broader global equities.
According to Mr Capron, this comes down to a few aspects of robotics and AI companies.
Digitalisation forms part of the solution to managing the changed way we work and live during the pandemic but is also part of a longer-term trend. Some companies will even directly benefit due to faster technology adoption.
The companies in the index have strong balance sheets, with 60% holding a net cash position. This means they’re well placed to weather any lockdown challenges.
This is a sector which, as a whole, has minimal exposure to areas that will be challenged during the pandemic.
“ROBO has virtually no exposure to the maximum pain points in this crisis. Things like energy, or bricks-and-mortar retail, transportation, leisure, hospitality,” says Mr Capron.
Robotics and AI form the solution
The global efforts to work from home, almost instantly, has meant that there has been faster take-up of newer technology than would normally have occurred. While video conferencing might be of the first technology that comes to mind as an area benefitting from the current environment, Mr Capron says logistics and warehouse automation is an interesting area of growth.
“E-commerce has seen another step-up increase in terms of utilization. There's an enormous strain that's being put on the logistical aspects of e-commerce... A good example of that would be Zebra Technologies here in the US, that provides all the track and trace technology that's used throughout the e-commerce supply chain or Manhattan Associate, another American company that provides the software that's behind warehouse management systems. Or… a Japanese company called Daifuku, that's the world leader in material handling and automated equipment for distribution centres,” he says, adding that these types of companies represent 12% of the ROBO Global Index.
In a similar vein, he views factory automation as an area to revisit post the crisis. Companies who have had to deal with labour shortages and shutdowns during the COVID-19 pandemic are more likely to reconsider factory robots and automation to avoid any reoccurrence of challenges they may have faced this time.
Computer processing and AI, representing around 22% of the ROBO Global Index, may be seeing an immediate benefit from the pandemic.
“Those are the companies that provide the software or the computer power that’s behind the infrastructure backbone of online businesses… So, companies like Nvidia or Xilinx, SericeNow, all these businesses are seeing a surge,” Mr Capron says.
Is now the time to buy?
Given the reliance on technology and the prospects for the future, investors may be wondering if now is the right time to buy into the robotics and AI sector through ETFs like the ETFS ROBO Global Robotics and Automation ETF (ASX code: ROBO).
Mr Capron views robotics and AI as a crucial sector now and in the future.
“Robotics and AI is not a niche. It is really a set of general-purpose technologies that can be applied to all markets, all industries, and it's happening now,” he says.
He is wary of saying when is the best time to buy in, given the difficulties of calling the bottom of the market but suggests from a longer-term perspective, buying robotics and AI could be attractive at this point.
Mr Capron says, “from a valuation standpoint, the index is trading on a trailing PE that’s around 22-23 times, that’s basically a 20% discount to the historical average, and at the high, we see the PE of 30 times. I don’t know if we’ve seen the low for this cycle yet, but I know that once we are past the lows, small and mid-caps will outperform and our strategies are very strongly tilted towards small and mid-caps.”
Whether you focus on the valuations now, or longer term, there is no question that robotics and AI are driving a major global industrial shift. If there’s a silver lining to the COVID-19 pandemic, perhaps it’s that it’s moving that shift faster, with benefits to how we work, as well as the companies fuelling that change.