Robotics sector looks primed for further growth in 2024

The favourable backdrop which growth equities enjoyed during the COVID-19 period of 2020 and 2021 – when the robotics and technology sectors performed strongly – came to a halt in 2022 as energy and defence moved to into investors’ crosshairs because of the troubled geopolitical environment.

During this period businesses and sectors that struggled during the lockdown periods were once again able to operate normally, and investors shifted their attention to reopening themes.¹  In this phase of more abundant growth, a broad range of companies and sectors were able to demonstrate abnormally high growth and thus genuine structural growth companies were no longer scarce and lost their scarcity premium.

When markets become less driven by unusual macroeconomic forces, the stand-out innovators with attractive fundamentals found within the Robotics universe could provide structural, long-term growth.

AXA IM’s investment strategy is broader than just traditional robotics. We invest in a wide range of companies, exposed to different end markets including robotic surgery, machine vision, warehouse automation, artificial intelligence (AI), autonomous vehicles and several other exciting growth areas.

Right now, there are many reasons why we are optimistic: not only did the technology sector markedly rebound in 2023 but we are seeing an abundance of innovation, new product cycles and a potential cyclical upturn for the robotics sector in 2024.

A global opportunity, with government support

While Asia remains the largest regional market for industrial robotics (China and Japan occupy the first and second places, respectively), other major economies are forecast to continue to invest heavily in 2024. The US is the third-largest market for robotics, and this is likely to increase following the introduction of significant supportive legislation.²

Between November 2021 and August 2022, the Infrastructure Investment and Jobs Act (IIJA), the CHIPS and Science Act, and the Inflation Reduction Act (IRA) collectively committed:

• Infrastructure Investment and Jobs Act: $1.2tn in Federal spending, with net additional funding of $550bn
• Chips and Science Act: $250bn boosting American semiconductor research, development, manufacturing and workforce development
• Inflation Reduction Act: Within this Act, $370bn to invest in, and incentivise, clean energy production and manufacturing

The scale and ambition of these acts – and the industries they’re targeting – provide a clear picture of the importance the US is placing on re-shoring and bolstering its domestic technology capabilities and partnerships.

This trend can be seen as a response to sustained geopolitical challenges and supply chain volatility. Together, these acts should empower the US to strengthen its global positioning, market share and stability. Capital expenditure underpinned by the government is less economically sensitive than it typically is, and this is resulting in large scale project announcements.

So far, only a fraction of the anticipated spend has occurred, and the activity associated with this is forecast to peak in 2026 but extend well into the remainder of the decade.  Whilst the US Acts are arguably the most high-profile, there are also similar policies in place across the EU, Japan, Korea, and many other economies that should help spur similar investment activity.

Supply chains and e-commerce – overcoming the pandemic contradiction

The warehouse automation market has faced the lingering legacy of the pandemic. Substantial order numbers accelerated through 2020 and 2021 on the increased usage of e-commerce, resulting in some overcapacity as global economies reopened post the COVID-19 lockdowns.³

During 2022 and 2023 we have been through a period of digestion as that excess capacity gets absorbed and this contributed to slowing automation orders. However, there are tentative signs this trend is bottoming out and may return to growth in 2024 onwards.⁴

The International Federation of Robotics (IFR) agrees - its 2023 World Robotics Report highlights sustained record numbers of robot installations, with Asia leading the demand, and with significant uptake from the consumer-led automotive and electronics industries.⁵

It forecasts the demand for robot installations will diverge even in a potential economic slowdown and predicts a new worldwide annual installation record of over 600,000 units.⁶

Similarly, industry experts are forecasting the year-on-year growth rate for orders should have bottomed out around the end of 2023, before picking up again in 2024 and 2025.

Semiconductors were heavily affected by supply chain volatility during the pandemic, which had a knock-on effect on both industrial machines and consumer electronics markets. The US CHIPS and Science Act provides just one example of government response to address this – tens of billions of dollars have been earmarked for semiconductor facility investments from countries around the globe since 2021 to support domestic manufacturing – in the EU, Korea and Japan for example.⁷

Industry revenues declined in 2023 but are expected to bounce back in 2024.⁸ In late 2023 IDC, a technology research firm, updated its expectations for semiconductor market growth to be around 20% in 2024.⁹  After a tough 2023 for revenue growth, this is meaningfully above average and a would represent a significant cyclical upswing. 

Appetite for innovation

Companies within the Robotech investment universe are generally at the cutting edge of research and development. This is particularly evident within industries such as semiconductors and electric vehicles (EVs) and we believe 2024 should see a cyclical recovery in the automation and semiconductor markets.

One of the key drivers behind the increased expectations for the semiconductor industry is the increasing demand for AI. As its capabilities and applications grow, it becomes increasingly disruptive – but this evolution requires vast amounts of data and processing power, which semiconductors can provide.

Emerging generative AI and large language models, such as the highly publicised ChatGPT, depend upon higher memory speeds and capacities. This, combined with AI’s increasing cross-sector penetration and its adaptability across the infrastructure, technology and application level, are likely to fuel the expected demand for semiconductors. Currently, most of the revenues for the AI industry are from the infrastructure segment – these are the semiconductors and computing power that is driving the industry. Companies like Nvidia, AMD and Cadence Design Systems, a software company focussed on designing chips, are well positioned here.

Climate-driven

EVs are benefitting from the additional pressure on governments to address the threat of climate change and obligations to net-zero commitments. Whilst adoption trends vary significantly around the globe, EVs are widely expected to overtake internal combustion engines; this consensus only differs when it comes to the estimated time horizon.

Current barriers to EV uptake are largely based around cost and infrastructure, both of which have the potential to be mitigated by significant investments in capacity.

Global spending commitments supporting the clean energy transition – which hit a record $358 billion in the first half of 2023 - could help expedite the necessary grid and infrastructure improvements.¹⁰  In 2023, there was roughly $750 of semiconductor content in an internal combustion engine car compared to $1,300 of semiconductor content in an EV.

With EVs forecast to contain $2,000 of semiconductor content by the end of the decade, this should set the scene for further long-term demand from the automobile sector. 

The case for active management

Attractive fundamentals are key to identifying those stand-out opportunities at the right time and unlocking their growth potential. Choosing an actively managed portfolio can help investors benefit from exposure to carefully selected companies within the Robotech universe.

At AXA IM, we use our extensive research capabilities and management expertise to find those companies which have shown resilient earnings growth and look undervalued relative to long-term prospects.  Over the past eight years that we have been running the strategy, we have had to navigate several macroeconomic and geopolitical shocks. However, the robotics industry has continued to grow despite these challenges, and we believe it is geared up for further long-term expansion. 

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