With the first half of 2023 now in the books, what an unexpected and challenging ride it has been. It’s hard to believe that what started out as a bear market rally could, in fact, be a new bull market globally. For the better part of this year, it feels like we have been asking ourselves how much longer we can keep walking the tightrope – particularly in the US, inflation has been abating while jobs have remained strong and economic growth has been buoyant. Nevertheless, as the Fed’s line in the sand keeps being drawn back further, will the market’s fireworks continue to dazzle after the Fourth of July holiday here in the US?
It goes without saying that tech outperformance has been the most staggering YTD as a real secular theme has provided strong tailwinds even amidst the high-rate environment. For equity investors, returns this year have been steady, after a brutal 2022. All of the ROBO Global Indexes were beneficiaries of the strength in technology.
ROBO Global Healthcare Technology & Innovation Index (Ticker: HTEC)
The ROBO Global Healthcare Technology and Innovation Index (HTEC) has underperformed compared to the equity market this year. For H1 2023, the HTEC index was up +4.38%. Investor interest in healthcare appears jaded after years of Covid disruptions, and healthcare equities have been underperforming, along with some of the largest healthcare companies seeing a sharp reversal after a strong two years led by health insurers which have recently warned of an uptick in medical costs attributed to pandemic-postponed procedures.
This may bode well for many of the HTEC index members going into H2 2023, with companies predominantly exposed to cutting-edge technologies in medical devices, lab process automation, and multiple healthcare areas of innovation including cancer, chronic and genetic diseases, diagnostics, and medical instruments. We believe the acceleration in elective procedures will benefit companies across orthopedic (Smith & Nephew and), cardiovascular (Abiomed, Edwards, Boston Scientific), ophthalmologic (Staar Surgical), spinal cord (Globus Medical), broader general surgery innovations (Integra – soft tissue reconstruction), and Robotic Surgery players such as Intuitive Surgical and Stryker.
Subsector performance YTD has been mixed, with the largest subsector Medical Instruments, which accounts for 27% of the index, posting a decent 13.4% return led by companies such as Tactile Systems (+117.2% YTD, yet market cap is ~60% off pre-covid levels).
ROBO Global Artificial Intelligence Index (Ticker: THNQ)
The ROBO Global Artificial Intelligence Index (THNQ) returned 11% in Q2, extending its 2023 gains to 36% as the AI ecosystem continued to recover after a dramatic pullback in 2022. Investors are playing catch up with the remarkably rapid adoption of generative AI. This is best reflected in the dramatic underestimation of demand for GPUs, which Nvidia’s sales guidance brought under the spotlight last month.
Many investors are focused on the largest cap companies, which trade at a significant premium to the market. However, we expect the rest of the AI ecosystem, which trades on more reasonable valuations, to continue to see pull-through and increased adoption for the remainder of the year. This includes other areas of AI applications, such as business process automation, logistics and manufacturing, healthcare, and autonomous vehicles.
10 of the 11 AI subsectors posted positive returns with Ecommerce as the outlier, as JD.com, Etsy, and Wix (excluded at rebalance) underperformed. THNQ’s two largest subsectors posted strong performance, led by Business Process (18.3% weighting) up +16.4% with Samsara, Adobe, Costar, and Fiserv showing strong gains; and Semiconductors (18.2% weighting) up +14.6% with NVIDIA, Global Unichip, and Lam Research leading the pack.
Some of the best-performing stocks this year are AI infrastructure providers in Network & Security (15.1% weighting) up +14.9% and in Big Data/Analytics (12.1% weighting) up +9.6%, which are critical enablers of generative AI but also ensure the availability and security of increasingly digital and autonomous operations. Standouts include MongoDB, which reported substantially better than expected sales and profits and announced many new AI-enabling products for developers; Pure Storage (scalable storage for AI use cases), Palo Alto Networks, and Snowflake, which markedly raised its mid-term outlook for margins at its investor day on the back of generative AI interest and adoption, and announced new partnerships with Microsoft and NVIDIA.
ROBO Global Robotics & Automation Index (Ticker: ROBO)
The ROBO Global Robotics & Automation Index returned 7.1% in Q2, extending its 2023 gains to 26.1%. The ROBO index outperformed global equities for a third consecutive quarter, despite foreign currency headwinds of more than 2ppt. ROBO returned 30.9% in the past twelve months and has outperformed global equities over the past one, three, and five years, and since its inception nearly ten years ago.
The Q2 gains were led by Logistics & Warehouse Automation (+18%), with strong returns from recent portfolio addition Symbotic, as well as Manhattan Associates, GXO Logistics, Toyota Industries and Cargotec. The sector continued its powerful recovery, after cratering in 2022 when bellwether Amazon pulled back on spending.
Computing & AI (+12.3%) saw standout advances at Nvidia and Global Unichip, with both stocks up over 40% in Q2. Adoption of generative AI tools has reached a frenetic pace, driving demand for computing power to largely unexpected levels, as reflected in Nvidia’s stunning announcement that its revenue in the July-ending quarter appeared set to reach $11bn, more than 50% above analysts' estimates at the time.
As fears of an imminent recession receded, industrial automation powerhouses Rockwell, ABB and Mitsubishi Electric also increased by double-digit percentages. In fact, Rockwell’s results point to an increasingly obvious boom in US factory automation, with 27% sales growth – a number we typically only see coming out of a recession. Meanwhile, Healthcare (+4.5%) and Food & Agriculture (1.3%) lagged, with declines at Illumina, iRythm, Tecan, and GEA.
ROBO ended the quarter trading on 27x forward earnings, compared to 24x at the beginning of the year and the long-term average. While multiple expansion has been remarkable in Computing and AI (now 30x) and Logistics Automation (now 31x), it has remained subdued in Manufacturing & Industrial Automation (18x), which continues to present significant growth opportunities in the context of rising costs and labor shortages.
According to Factset, earnings estimates point to median EPS growth of 12% in 2023 and 15% in 2024 for the ROBO index, significantly above the 3% and 7% EPS growth expected for the S&P500.