Regardless of the hardships 2022 delivered, a quick have a look at the place we’re at this time provides a much-needed supply of optimism for what might make our needs for a extra fruitful New 12 months come true. On the draw back, massive tech’s current fall from grace was one for the historical past books, with the previous decade’s inventory market darlings ending the yr as notable laggards.  

However there was constructive information as nicely, with 2022 bringing essential breakthroughs in automation—the only focus of our analysis at ROBO International. In synthetic intelligence (AI), Dall-E andChatGPT demonstrated the profound impacts of expertise utilizing generative AI that allows anybody to create illustrations and textual content at lightning pace with only a few easy directions to a pc program. On the robotics entrance, pandemic-driven provide chain disruptions created a significant push towards manufacturing unit and warehouse automation, thrusting firms that ship collaborative robots and adaptive-control machining into the highlight. We consider automation continues to be one of many world’s most constant and worthwhile themes. 

There may be doubtless extra development to be seen throughout the panorama of automation, together with robotics, AI, and healthcare expertise. Sure, shares are coming off their worst yr since 2008, however probably the greatest issues concerning the New 12 months is the chance for a contemporary slate. As evidenced by the good points throughout our indices, 4Q22 introduced some stabilization and inexperienced shoots that could be setting the stage for development. 

ROBO: Robotics & Automation Index

The ROBO International Robotics & Automation Index (ROBO) returned 12.1% in This fall, outperforming the 9.8% acquire for the MSCI AC World Index in the course of the quarter. After a document 42% drawdown from its November 2021 excessive by way of September 2022, the index of best-in-class robotics & automation equities all over the world rose within the double digits, led by sturdy good points in Europe (+25%) and Logistics Automation (+20%), whereas US (+7%) and 3D printing (-14%) shares lagged.

Whereas the 33.1% annual decline in 2022 was unprecedented for the reason that inception of the ROBO index in 2013, it got here after a 120% cumulative acquire within the prior three years, and it was pushed by a 1/3 compression in valuation multiples: ROBO is buying and selling on a ahead PE ratio of 22x in comparison with 33x a yr in the past. Within the meantime, earnings have remained on a strong development trajectory, reflecting the continued energy of demand for automation expertise and options, and the flexibility of firms within the ROBO to deal with rising price and provide chain challenges. Earnings estimates for 2022 and 2023 have been reduce by 0-4% over the previous 3 months and by 9-10% over the previous 12 months. In the meantime, income estimates have remained practically unchanged and presently level to 11% YoY in each 2022 and 2023.

Logistics Automation, which accounts for 14% of the index by weight, noticed a 20% acquire in This fall after three consecutive quarters of losses however stays down 44% for the yr and again to pre-Covid ranges, regardless of the numerous improve in enterprise volumes. Equally, Sensing, Actuation, and 3D printing are all buying and selling under pre-Covid ranges, which is especially fascinating since that was low within the industrial cycle. The excellent news is that manufacturing PMIs all over the world are actually under 50, a degree that has traditionally supplied glorious entry factors in Manufacturing unit Automation shares (1/3 of the ROBO portfolio). But opposite to prior industrial downcycles, order backlogs at market and expertise leaders stay terribly excessive and supply enterprise leaders with a lot better visibility than in prior tender markets.

We additionally anticipate Japanese firms, which account for 22% of the ROBO index and have a mixed 40% share of the world’s industrial robotic market, to profit from 1) the strong financial restoration in China after a chaotic path out of Covid restrictions, and a couple of) the dramatic depreciation within the Japanese Yen, which gives a considerable price benefit and will result in margin enlargement.


THNQ: Synthetic Intelligence Index

The ROBO International Synthetic Intelligence Index (THNQ) rose 4.4% in This fall, underperforming the MSCI AC World Index (+9.8%) and S&P 500 (+7.6%). Valuations contracted additional, right down to 4.5x Ahead EV/Gross sales vs 6.9x historic common. This fall noticed gross sales development of 18%, whereas EBITDA development accelerated to 32% vs the 17% historic common since 2013.

Within the final quarter of 2022, absolutely the standout improvement in Synthetic Intelligence was the fulgurant adoption of generative AI fashions throughout language, picture, and video functions, taking the world by storm. Firms like Microsoft are already implanting Open AI’s expertise corresponding to GPT-3 and DALL-E-2 into enterprise and shopper merchandise corresponding to 365 and Bing search. We anticipate commercialization and subsequent downstream utilization to additional profit the whole house. 

We noticed a robust turnaround in one of many worst-performing subsectors within the yr as much as Q3: Semiconductor (17% weighting), which was up 21%, with quickly rising publicity to IoT, Cloud, AI, and Automotive. We noticed additional cloud infrastructure CapEx and huge mission bulletins, together with a $40 billion Taiwan Semiconductor 3nm chip fab in Arizona (additional benefiting fellow index members like ASML, Lam Analysis, and Teradyne).

The Client subsector (6% weighting) additionally noticed sturdy efficiency +13%, pushed by good points from firms like Reserving Holdings seeing sturdy bookings development, Netflix seeing sturdy internet new subscribers and constructive improvement on pricing fashions, and Digital Arts touchdown a Marvel partnership and seeing EPS steering elevate. Client had been one of many first areas to get hit negatively by inflation fears and has since been among the many first to rebound.

Community & Safety (13% weighting), which had been the yr’s strongest performing subsector with combined efficiency, noticed a number of firms like Crowdstrike, Rapid7, and Snowflake decline considerably on issues over slowing development. We’re nonetheless inspired and have a robust conviction right here as this space stays a precedence throughout governments and firms.

The largest laggard was Cognitive Computing, which was down 18% fully resulting from Tesla’s 54% drop in the course of the quarter. The market is realizing that Tesla isn’t the one EV participant anymore (market share within the US for EVs has declined 10% as incumbents and new gamers enter the house), whereas Elon Musk’s foray with Twitter hasn’t fully appeased shareholders both. We proceed to treat Tesla as a expertise and market chief.


HTEC: Healthcare Expertise & Innovation Index

The ROBO International Healthcare Expertise & Innovation Index (HTEC) rose +6.9% in This fall, barely underperforming S&P International’s +7.5% acquire. Whereas a lot of the general public discourse has been targeted on Covid, innovation in healthcare continues at an accelerating tempo. For the yr ending 2022, the HTEC index declined 33%, underperforming main indices corresponding to S&P 500 and ACWI’s 18% decline. HTEC index was buying and selling on 4x Ahead EV/gross sales on the median, in comparison with the February 2021 excessive of seven.2x.

General, 2022 was a difficult yr for HTEC index members versus the worldwide market indices. Whereas there have been many sturdy performers in the course of the fourth quarter and 6 of the 9 sub-sectors posted constructive returns, HTEC declined ~33% for the yr in comparison with ACWI and S&P 500’s -18% decline.

Particularly, in the course of the fourth quarter, subsectors corresponding to Robotics, Medical Devices and Diagnostics posted stable good points pushed by procedural restoration and M&A requirement for progressive cardiovascular options. Within the largest-ever acquisition within the MedTech trade, J&J introduced its intent to accumulate HTEC index member Abiomed (+50%) for $16.6 billion. With 18 years of worthwhile development with its breakthrough applied sciences for coronary heart and lung assist, Abiomed is disrupting the $77 billion cardiovascular trade. Much less invasive options that enable for brief hospitalizations for improved outcomes stay a core emphasis within the HTEC portfolio. As well as, index members corresponding to JD Well being (+59%), Actual Science (+52%) and Tactile (+47%) additionally demonstrated outperformance in the course of the quarter as next-generation diagnostic options and scientific care options had been in sturdy demand because the world confirmed indicators of normalcy after lengthy durations of covid lockdowns. 

In the meantime, the Genomics subsector continues to be a combined bag with index members Guardant Well being (-49%) and Nanostring (-38%) had been below strain in the course of the quarter whereas Veracyte gained +43%. Particularly, Guardant Well being’s newest research round their colorectal blood screening check introduced issues concerning the commercialization prospects. Whereas shares have been reset with this disappointing information on efficacy charges, it should nonetheless present much less invasive choices for a whole lot of 1000’s of individuals screening for colorectal most cancers yearly. On the constructive entrance, Veracyte raised its full-year 2022 forecast and posted a 25% Y/Y rise in quarterly income, helped by sturdy efficiency in its most cancers diagnostic exams. Veracyte makes use of AI-enabled genomic expertise to hurry up medical analysis and supply earlier therapy for these at excessive danger for thyroid and prostate most cancers. Whereas the businesses in our Genomics sub-sector confirmed volatility up to now yr, the extreme a number of compressions will present important upside alternatives for 2023. Lengthy-term drivers and demand for genomic applied sciences have solely strengthened our Genomic index members and. HTEC stays well-positioned. 

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