Turnkey Tech Investing: October 2022 Market Brief

By Bill Studebaker, CIO & President, ROBO Global

As trick-or-treaters (and those of us with leftover treats at home) battle the inevitable post-Halloween sugar high, investors may be wondering if it’s time for the market, too, to come down from its own ‘candy high’ and get back to normal. We investors all basked in elevated stock prices for years, and we now find ourselves longing for some clarity regarding what to expect next. While many were hoping 3Q earnings would illuminate the path ahead, this market continues to surprise us all. Instead of answers, with each headline and incremental datapoint, we are left with only one question: “is this a trick, or a treat?”

The final week of October delivered one of the most interesting juggling acts equities have seen in some time, with big tech severely disappointing on earnings and treasury yields compressing on renewed hopes for a Fed pivot. Amid the confusion, automation proved its ability to rise to the top. For the month of October, the ROBO Global Healthcare Technology and Innovation ETF (HTEC) rose +5.14%, the ROBO Global Robotics and Automation Index ETF (ROBO) was up +6.68%, and the ROBO Global Artificial Intelligence ETF (THNQ) gained +4.19%. [1] 

The question of what comes next remains. Earlier today [2], the Fed raised its benchmark interest rate for the sixth time in a row, up to a range of 3.75% to 4%. Regardless of what investors may have been wishing for, the hike came as no surprise. Now, as FOMC members reevaluate the timing of rate hikes post-November, what seems to be missing is the pain of a higher terminal rate—potentially as high as 5%. Still, in an environment where investors are desperately seeking signs of a pivot, it is not hard to imagine which datapoints this market finds most compelling. The trajectory of the Dow always seems to lead the pack, and yet even that data is perplexing. Sure, the Dow (INDU) had its best relative month of performance vs. the Nasdaq (NDX) since April of 1999. Does this mean there is a regime change afoot, or is the performance merely a short-term response to front flows as the market grapples with higher rates? 

Whichever way the mystery plays out, we believe one thing for certain: the importance of managing costs grows in a market that requires capital efficiency. This may make investing in automation not a ‘want to have’ but a ‘need to have’ to survive and grow. Automation is finding its place in the sun as a silver bullet of sorts; in our opinion, there is no other solution that simultaneously addresses supply chain struggles and labor shortages. As a result, investors may find that the time is right to shift away from FAANG [3] stocks and other high-growth winners to what appears to be the next generation of super-growth stocks: companies that deliver goods and services across the vast supply chain of automation. 

Evidence of the growth in robotics and automation is everywhere. Keyence, a provider of Japanese sensing technology for factory automation, is just one illustration of this reality in play. The company recently reported sales growth of 16%-40% YoY in Japan, Europe, the US, and Asia. Q2 FY 2023 operating profits of ¥139bn largely beat consensus of ¥128bn, and revenue was up 36% YoY. [4] Like other automation solution providers, Keyence has not seen a downturn in overall demand (smartphone-related demand in China appeared to be the only weak spot). Keyence is also an example of pricing power in factory automation; the company raised its prices by 10-35% in Japan early last month, and it plans to follow suit globally as appropriate in the coming months.

The urgent need for automation is a bright spot, but there is no denying the fact that inflation is likely to continue to haunt investors. The Fed remains committed to raising rates in order to deliver ‘pain’ that slows consumer spending. But for the Fed to achieve their goal of curbing inflation, wages must fall, job losses must rise, earnings must contract meaningfully, and a recession must ensue—all of which promise to deliver significant headwinds to stocks. Volatility has become an unwelcome constant, and while we don’t know what the journey ahead will be, I suppose we can find solace in the fact that it is often darkest before the dawn.

Today, the CPI stands at 8.2%Y, a 40-year high and marginally below its peak of 9.1%Y in June. In contrast, the M2[SJ1] [5] is growing at just 2.5%Y and falling fast. These are data points that we believe will push the Fed closer to pausing (or at least pivoting) its aggressive tightening campaign. While we don’t expect to see a dramatic shift any time soon, the markets have a cunning way of getting in front of the Fed’s actions. In short, investors may be as offside on inflation today as we were in March 2021—just in the opposite direction. M2 growth is quickly approaching zero, and the 3-month to 10-year yield curve has finally inverted, both factors Chairman Powell has noted are important in determining if the Fed has done enough with rates. 

What does all that mean as we head into the final months of 2022? At ROBO Global, we’re singing the same refrain as when we first chose to focus on helping investors capture the unique opportunities of fast-growing robotics, artificial intelligence, and healthcare technology companies around the world. Automation is synonymous with long-term growth. Automation is not a dream for the future, but an urgent mandate for today.

For investors, it may prove to be the “treat” that stays sweet amid a market full of far too many “tricks.” 

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

SOURCES: 

[1] Source: ROBO Global®, S&P CapitalIQ, For standardized performance data current to the most recent month end, please visit www.roboglobaletfs.com. 
[2] As of 11/2/2022. Source: https://www.cnbc.com/2022/11/02/fed-hikes-by-another-three-quarters-of-a-point-taking-rates-to-the-highest-level-since-january-2008.html 
[3] Facebook, Apple, Amazon, Netflix, Google
[4] Source: Keyence
[5] M2 is a measure of the money supply that includes cash, checking deposits, and easily-convertible near money.

The performance data quoted represents past performance and is no guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor's shares, when sold or redeemed, may be worth more or less than the original cost.  Current performance may be lower or higher than the performance data quoted.

Index returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Holdings are subject to change. 

This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the fund or any security in particular. Please consult your financial advisor for further information.