Robotech strategy: Demand for industrial robotics is currently strong in Asia
- Global equity markets modestly declined in October
- We saw performance from Semiconductor and Japanese automation specialists
- We added to our Japanese robotics exposure
After a stronger start to the month, global equity markets modestly declined in October with COVID cases in Europe continuing to rise and several European countries announcing lockdown restrictions. These new announcements, coupled with uncertainty created by the upcoming US election weighed on markets. Notably, the newly introduced restrictions will likely have further impacts on the parts of the economy that are already struggling such as high street retail, hospitality and travel. However, factories, manufacturing and construction are this time being encouraged to remain open which should help to support industrial demand and activity.
The third quarter earnings season is progressing and generally speaking, corporate results have come in substantially better than anticipated, with a stronger recovery coming in areas like medical procedures and car sales as well as a broader pick up in Industrial activity led by Asia.
Portfolio positioning and performance
Fanuc, a Japanese automation specialist and industrial robot manufacturer, continued to performed well, announcing results that were better than anticipated, highlighting strength in its Robomachine business, increasing robot sales and more than doubling its full year operating profit target. IPG Photonics, a leading manufacturer of fibre lasers used in metal processing reported strong results, with strength in China and the high power segment.
Within the semiconductor space, NXP Semiconductor reported strong results on improving automotive sales and Teradyne highlighted strength in it chip testing business, supported by strong orders from smartphone manufacturers.
We saw some weakness from Dexcom, a leading manufacturer of continuous glucose monitoring devices for diabetic patients who reported a modest delay to their next generation device, the “G7” which is due to launch in the second half of 2021. Dexcom has been a strong performer so far this year as it continue to gain significant share in diabetes management.
We added to our Japanese robotics exposure earlier in the month – increasing our holdings in Robotics companies Fanuc and Yaskawa as well as increasing our weight in SMC, a leading supplier of motion control equipment. Demand for industrial robotics is currently strong in Asia, led by the consumer electronics and smartphone investment cycles. We are starting to see a broadening of demand with order trends for robots improving in the US and Europe. Sales of Electric Vehicles (EV) have been strong in 2020 and as such, we see a greater confidence from automotive companies to deploy CAPEX1 for EVs, which, coupled with the investment from battery manufacturers should be supportive for robot demand going forward.
We continued to modestly increase our positions in semiconductor companies more associated with industrial and automotive end markets, such as Microchip, NXP and Texas instruments as we see stronger demand here.
At the time of writing, the final results of the US election haven’t been confirmed and it appears too close to call a winner. Our initial read is that the lack of a substantial majority, either a “red wave” or “blue wave”, reduces some of the tail risks of the election result. Notably, at present, it appears to reduce some of the risks of major corporate tax rate increases in the US that could have been associated with a strong Biden win. More generally, we believe that there is strong support from both candidates for fiscal stimulus to aid the economic recovery post COVID-19 and would anticipate this to be a priority in either a Trump or Biden victory.
Ecommerce has seen volumes rise significantly during the lockdowns and companies with a strong online presence have benefitted whereas companies that have been slower to adopt ecommerce have often struggled. With the additional restrictions recently announced in Europe, we anticipate continued strong ecommerce sales and associated CAPEX1 investments. Q42 is traditionally the strongest period seasonally for retail, particularly due to holiday periods. Retailers will likely have to step up their investments to support the surge in demand. For context Amazon now have 50%3 more capacity at their fulfilment centres than they did at the end of 2019, highlighting the magnitude of the investments being made. Whilst some of this current shift to ecommerce is temporary, we do believe that some spending habits will be permanently altered. To support this shift towards ecommerce going forward, we anticipate major spending for logistics and fulfilment centres as companies need to reinforce their capabilities in this area. This increase in CAPEX1 will likely be beneficial to a wide range of automation suppliers.
We see strong roll out of 5G base stations in China and elsewhere in the world and anticipate healthy adoption of new 5G handsets as they get launched. This is supportive of automation equipment used to manufacture these 5G handsets (consumer electronics is one of the largest buyers of industrial robots) as well as a range of semiconductors that are used in 5G devices. Looking forward further in to the future, the broader adoption of 5G will allow for enhanced connectivity and communications that we believe will spur the development of increasingly smart and automated factories as well as connected vehicles.
The disruption of global supply chains as a result of COVID-19 as well as the previous impacts of the US-China trade war is forcing companies to rethink their manufacturing footprints and their sourcing of crucial components. Whilst it will take a huge amount of time to reconfigure global supply chains, we believe that marginal investments may well return to the US and Europe as a result of these issues, as well as the fact that the cost advantages of outsourcing manufacturing to developing nations continues to diminish each year. Whilst we are not forecasting wholesale changes, incremental investments in nearshoring manufacturing will come with a higher degree of robotics and automation technology which we believe should provide a long term support to this theme.
No assurance can be given that the Robotech Strategy will be successful. Investors can lose some or all of their capital invested. The Robotech strategy is subject to risks including; Equity; Emerging markets; Investments in specific sectors or asset classes; Global investments; Investments in small and/or micro capitalisation universe; ESG.