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In the years BC (Before Covid) and before they became known for their mantra of Build Back Better, the leading lights of the World Economic Forum came up with the expression ‘The Fourth Industrial Revolution’.

This described the new and emerging world of hardware in terms of robotics, automation and additive technology (3D printing) that was blending with the software world of artificial intelligence, cloud computing and the internet of things.

Digitisation meant the instructions to manufacture something in China could be transmitted from California, or indeed the surgeon operating on the child in Egypt could actually be in France.

This combination of digitisation with a blend of hardware and software made robotics and automation, or robotech, one of the earlier global growth thematics for investors in this latest phase of globalisation.

Indeed my previous home at Axa Framlington involved working very closely with the team on their highly successful Global Robotech fund from its launch back in 2016.

It also involved a strong focus on China, not necessarily in terms of the stocks selected, but in recognising that from around 2012 and the arrival of Premier Xi Jinping, the ‘Made in China 2025’ plan meant China would easily become the biggest market in the world for industrial robots.

This point was missed by many in the West, who continued to regard China as a traditional emerging market dependent on cheap labour. Western companies, however, were keenly aware of the size of the Chinese market and of its ambitions, as the traditional robotics customers, such as autos, were bypassed in terms of growth by other industries such as food and beverages, electronics and appliances.

There was much handwringing at the time that replacing people with robots was going to be a problem, both socially and economically, but these issues also troubled the First Industrial Revolution and were equally shown as untrue back then.

By increasing productivity, robotics and automation freed up labour for other roles while simultaneously improving quality and reducing prices – thanks to competition.

From hardware to software

As is so often the case with thematic investing, it often made more sense to invest in the equipment and software manufacturers, who were supplying the ‘picks and shovels’ into this cap-ex cycle, than to necessarily back the companies making the investments.

But, equally over time it is important to acknowledge that the biggest manufacturers of robots will be companies who ultimately use robots to make them, increasing competition and lowering profitability.

It is thus interesting to note that the composition today of, for example, the iShares ETF set up to track a benchmark index of robotics and automation (ticker RBOT ln) is now much more heavily skewed towards the software side of automation than the hardware side of robotics.

Thematically, the Fourth Industrial Revolution is also moving towards co-bots, robots that enhance the productivity of workers. This is not extra (artificial) arms – although amazingly that is nearer than you think – but rather a shift from relacing all workers in the auto factory or bottling plant to providing autonomous and semi-autonomous assistants, which is where the software is dominant.

The computing power and associated software in an autonomous vehicle, for example, is phenomenal which is why semiconductor makers and computer graphics specialists like Nvidea are now regarded as robotics and automation plays alongside old favourites like robot maker Fanuc, sensor manufacturer Keyence or robo-surgeon company Intuitive Surgical.

As ever, we can play the themes through a relatively narrow range of stock ideas, or through funds like Framlington’s, or indeed through the theme-tracking ETFs.

One interesting aside, when Kuka, a leading German manufacturer of robotic arms, was effectively bought out by a Chinese appliance manufacturer, Midea, back in 2016 for around $5bn, we saw a brief period when the rump 5% of the stock that had not been sold was squeezed dramatically by, ironically, the investing robots trying to match the robotics and automation index.

One robofund in particular hadn’t been ‘told’ that there was essentially no free float left and was repeatedly trying to buy more stock. It corrected itself of course, but this was an early symptom of something we have discussed before about thematic funds.

When funds become more popular and they are market cap based, then the larger weighted stocks, which are not necessarily large-caps in the wider sense, become squeezed.

This imparts a virtuous circle as the stocks already held in the biggest weighting squeeze higher, leading to great ‘outperformance’ usually against the ‘wrong’ benchmark which in turn leads to more flow.

This liquidity effect is often both understated and misunderstood and when the flow is from a robot trying to match an index it can be dramatic. At the end of the day, it’s best to have the systems assist you rather than replace you. Investment co-bots are the answer!

Mark Tinker is a former top-rated sell side strategist and successful global thematic equity fund manager for Axa Investment Managers both in the UK and Hong Kong.

He recently founded Market Thinking as an investment advisory boutique with a focus on investment solutions and tactical asset allocation. Mark blogs regularly at market-thinking.com.

Any opinions expressed by Citywire, its staff or columnists do not constitute a personal recommendation to you to buy, sell, underwrite or subscribe for any particular investment and should not be relied upon when making (or refraining from making) any investment decisions. In particular, the information and opinions provided by Citywire do not take into account people’s personal circumstances, objectives and attitude towards risk.

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