Turnkey Tech Investing: May 2023 Market Brief

By Bill Studebaker, CIO & President, ROBO Global 

For some time, markets have been grappling with a handful of counteracting dynamics, including the clash between the bulls and the bears, the interplay between stimulus and inflation, and the delicate balance between growth and rate hikes. Adding to the mix in May was the US debt-ceiling conundrum and, of course, the ‘emergence’ of AI.

Despite occasional glimpses of one side pulling harder in each tug of war, it is striking just how polarized these debates remain—including the differing views on the growth outlook for robotics and AI. In my opinion, the naysayers have already lost the battle on this count. The massive growth of robots and AI is not a question but a sheer inevitability. I may sound like a broken record, but this is the message I’ve been broadcasting for the past 8 years. 

Of course, the bullish narrative extends far beyond the trajectory of AI, bolstered heavily by US soft landing expectations that are underpinned by a strong labor market, improved earnings trends, and the easing regional banking stress. Still, sticky global inflation, tightening lending standards, narrow US market leadership, and an underwhelming China recovery continue to add some bearish angst to the mix. Even with the resolution of the debt-ceiling issue, it remains to be seen where equities will run—at least in the near term. 

For the month of May, with artificial intelligence now on the center stage of most investors’ minds, The ROBO Global Artificial Intelligence ETF (THNQ) advanced +11.84%, while the ROBO Global Robotics and Automation Index ETF (ROBO) gained +2.10%, and the ROBO Global Healthcare Technology and Innovation ETF (HTEC) declined -4.47%. [1]

It’s remarkable that just 6 stocks—Apple (AAPL), Microsoft (MSFT), Nvidia (NVDA), Alphabet (GOOGL), and Facebook (META)—have accounted for nearly all of the S&P 500 (SPX) YTD return. But with a closer look, that news should come as no surprise. Nvidia guiding 50% above consensus was nothing short of historic as the chipmaker is on the cusp of the trillion-dollar club, while the others, all strong tech companies with relatively long histories of success, continue to rise with the tide. While the AI boom has clearly become a secular growth tailwind, it is worth noting that there are still areas of weakness even within tech.

Over the past few years, we’ve discussed the impact of all forms of AI in areas such as autonomous vehicles, computer vision, and collaborative robots. Today, the market is more narrowly focused on generative AI, of which ChatGPT is arguably the most well-known example. Generative AI is capable of creating, classifying and condensing content including text, image and audio. It is also used to generate ‘synthetic data’—new artificial data based on key facets within a smaller sample of real data, that is typically used to accelerate the training of other AI programs and avoid potential issues around privacy that arise when using primary data. The capabilities of generative AI are advancing at a remarkable pace. The costs of developing and training models today typically run to many millions of dollars, but open-source models are gaining ground and are expected to drive rapid adoption of this key technology. Concurrently, synthetic data could empower start-ups to challenge incumbents whose historical data repositories are perhaps less of a moat now than once seemed the case. This may mean some of the anticipated cost savings made above need to be re-invested.

Given the growing importance of AI, the call for investors to take advantage of this megatrend is becoming especially urgent. Generative AI’s ability to augment core processes within AI models will have a direct impact on the pharmaceutical, manufacturing, media, architecture, interior design, engineering, automotive, aerospace, defense, medical, electronics, and energy industries. And its ability to improve business processes across organizations will impact marketing, design, corporate communications, training, and software engineering. Gartner Research (among many others) clearly sees the writing on the wall. Its near-term predictions [2] paint a clear picture of the massive impact that lies just ahead:

• By 2025, more than 30% of new drugs and materials will be systematically discovered using generative AI techniques, the use of synthetic data will reduce the volume of real data needed for machine learning by 70%, and 30% of outbound marketing messages from large organizations will be synthetically generated, up from less than 2% in 2022. We note that Salesforce recently announced the release of its Einstein GPT to generate personalized emails to customers on behalf of salespeople, specific query responses on behalf of customer service professionals, and targeted content for marketers.
• By 2026, over 100 million humans will engage robo-colleagues (synthetic virtual co-workers) to contribute to enterprise work.
• By 2027, nearly 15% of new applications will be automatically generated by AI without a human in the loop, up from 0% today.

In our view, the breadth of Gartner’s predictions places general purpose technology (GPT) status on generative AI on par with the impact of the printing press, electricity, railroads, and even the internet. As with these earlier innovations, generative AI is likely to have a significant effect on the labor market. For investors ready to make the most of this incredible shift, our THNQ ETF offers diversified access across the value chain of artificial intelligence.

Eight years ago, ROBO Global was an outlier. We, too, saw the writing on the wall—though earlier than many who lacked the deep knowledge and insights into the world of automation, robotics, and AI. Today, even in the thick of a turbulent economic and market environment, our strategies are poised to help investors take advantage of what has ‘suddenly’ become an undeniable and momentous paradigm shift driven by these vital technologies.

ROBO Top Ten Holdings, HTEC Top Ten Holdings, THNQ Top Ten Holdings

SOURCES:
1 Source: ROBO Global®, S&P CapitalIQ
2 “Beyond ChatGPT: The Future of Generative AI for Enterprises,” Gartner, January 26, 2023

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