The Rise And Rise Of Automation And Artificial Intelligence

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The Rise And Rise Of Automation And Artificial Intelligence

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Zooming into the future

Why automation is here to stay

Robotic police officers, parcels delivered by drones, flying taxis, and driverless cars would once have sounded like science fiction or a distant reality, but all these things are already in the here and now – and are prevalent in smart cities like Tokyo, Singapore, and Dubai. And that’s just the beginning: the entire world’s becoming more automated, whether in the manufacturing industry, the services sector, or in our very own homes. Automation is undeniably one of the biggest trends of this millenia: it’s no wonder the world’s largest investment manager BlackRock noted technological breakthroughs one of its investing megatrends. These advances make our lives more convenient, sure, but they also offer huge potential investment returns.

What is automation?

Simply put, it’s the technology that enables a process to happen with minimal human interference or assistance. Zooming out, automation also describes the technological advances that allow machines to perform increasingly sophisticated tasks. The ultimate goal of automation is to increase productivity and efficiency, while minimizing errors, improving safety, and reducing labour intensity. In other words, one of automation’s aims is to replace low-skilled tasks, and in doing so free people up to do more complex and rewarding things.

What’s driving automation?

You are. We all are, whether we’re investors or consumers. Investors, naturally, make demands of the companies they’re invested in – and want to see them consistently grow their earnings. In response, companies – also battling against competitors – have looked to automation as a way of reducing costs and boosting profits. Consumers, meanwhile, demand ever-faster service and higher-quality products (partly thanks to the likes of Amazon and Alibaba raising expectations about what’s achievable as far as things like delivery times go), pushing consumer-facing businesses towards automation. And as income levels and living standards rise globally, there’s a greater demand – and ability to pay – for in-home automation services too.

Automation itself, of course, isn’t new. In manufacturing, for instance, the major trend of the last decade’s been a shift towards more mechanisation. And in retail, the disappearance of brick and mortar stores and the rise of ecommerce brings with it greater need for warehouse and logistics automation.

Can I profit from this trend?

Many high-profile institutional investors are already betting big on the potential of automation and robotics, and frankly there’s no reason you can’t join them. Technology advancing at an exponential rate makes investing in automation both exciting and risky. Nevertheless, we’ll dive into a few pockets of opportunity you might want to take a closer look at.

Opportunities in industrial automation

Ways to profit from factories getting more efficient

What is industrial automation?

Just as automation is focused on using technology to reduce labor intensity, and improve productivity and efficiency, industrial automation aims all that effort at machine- and manufacturing-based processes. Recent innovation, rising competition, and demanding shareholders have all driven an accelerated adoption of industrial automation.

Some of the most well-known examples of industrial automation are in metal fabrication – that’s machining, welding, and cutting – in places like car manufacturing plants; food and drinks processing in breweries and sausage-making factories; and packaging handling in places like warehouses.

It’s safe to say, in fact, that it’s now a key element of all major companies’ strategies. The ultimate goal for any such company would be fully automated supply chains and manufacturing processes that can work 24-7, earning money round the clock.

It’s no surprise, then, that there’s a lot of money being spent on trying to achieve that dream – which means there are investment opportunities aplenty. Indeed, Allied Market Research predicts the global market for factory automation will grow an average of 9% a year until 2025. By comparison, the International Monetary Fund forecasts the global economy will only grow 3.5% each year in the medium-term.

Where can I find investment opportunities?

Investing in stocks is risky business, so one way to avoid putting all your eggs into a single industrial automation basket is to look at exchange-traded funds (ETFs). These let you invest in several companies at once, meaning you can benefit from their share price rises without losing out too much if something goes wrong at a single firm. There are several to choose from, each with different focuses and fees, but the biggest out there is Global X Robotics & Artificial Intelligence Thematic ETF.

If you do want to look at individual companies, however, you may want to start by looking at the universe of global industrial giants such as Emerson Electric, Honeywell, Siemens, ABB, Mitsubishi Electric, and Rockwell Automation. Our Packs on stock picking (see Related Content at the end) can help you cherry pick winners but even the pros get it wrong half the time. Some things to look out for, though, include the level of spending on research and development relative to sales (a higher ratio could suggest more spending on automation), sales and earnings growth (since you’ll want to buy into a growing, rather than shrinking business), and the amount of cash the company has on hand.

Investing in home automation

There’s smart money in smart homes

Take a look around your living room: you can shop using Amazon’s Alexa, plan your day using Google’s Home or Hub devices, and control your heating and lighting via an app. Suffice to say smart homes are already a reality. And depending on where you live, you might receive your parcels – or your lunch – by delivery drone. And while Amazon and Alphabet are the most obvious beneficiaries of this new wave of in-home tech, there are lesser-known companies making inroads too.

How can I invest in home automation?

It’s not just Big Tech leading the home automation charge: there are countless companies along each stage of the supply chain – from component manufacturers to installers and service providers. Multinational conglomerate Philips, for instance, provides smart lighting that you can control with your voice. Control4, meanwhile, was the only publicly traded company focused solely on home automation. It was acquired in 2019, perhaps inevitably, by a privately held firm SnapAV. And there are also telecoms companies looking to capitalize on the opportunity, with the likes of Comcast bundling security and lighting services alongside their cable TV and internet service offerings.

Opportunities in robotics

Rise of the machines

Are the machines taking over?

The field of robotics is a major subset within automation. And industries like autos and healthcare are already using robots to make their processes more efficient: for instance, autonomous – or self-driving – vehicles is currently the most in vogue use of robotics in the autos industry, and in healthcare, robots are used extensively to make medical equipment – and others to read and process your x-ray scans without any human intervention. It doesn’t stop there, either: Statista predicts the global robotics market will grow from $39 billion of annual revenue in 2017 to $500 billion in 2025. Maybe the machines really are taking over…

How can I invest in robotics?

In a roundabout way, you might already be doing so – or at least, investing using a robot – if you use robo advisors to manage your investments. They use automated algorithms to invest your money with minimal human supervision.

But putting that aside, individual public companies that offer exposure to robotics include iRobot, KUKA, Cognex, and Fanuc – as well as ABB and Rockwell Automation mentioned earlier. There are also a handful of ETFs tracking the theme including the ROBO Global Robotics and Automation ETF, the Global X Robotics & Artificial Intelligence ETF which tracks companies across various sectors all working on developing and producing robotics and artificial intelligence (AI) solutions, and the iShares Robotics and Artificial Intelligence ETF which tracks an index of companies in both developed and emerging markets that stand to benefit from the long-term growth and innovation in robotics. A more daring option would be actively managed funds, where an investment manager picks individual stocks they think will outperform: two such funds include Pictet – Robotics and AXA Framlington Global Technology.

Artificial intelligence

The biggest investment opportunities in AI

AI is undoubtedly the most exciting and promising area of automation as it’s the primary driver behind the advances in other areas of automation. As for what actually constitutes AI, it’s fair to say it’s the ability of computer systems to behave in ways that would normally require human intelligence without human interference. Speech and image recognition, machine learning, and language processing are all examples of AI in action.

From predictive Google searches to personalized Netflix movie suggestions and Alexa’s answer to your questions, AI is behind many of our technology interactions – and it’s set to transform almost every industry. Consultancy McKinsey reckons 70% of companies will be using at least one type of AI by 2030, and investment bank Morgan Stanley forecasts the AI industry will generate $1 trillion in annual revenue by 2050.

Who are the key players in AI?

The usual suspects in Big Tech are unsurprisingly front and center of the AI revolution: think companies like Apple, Alphabet, Amazon, IBM, Microsoft, and Tesla. AI has helped all these companies enter adjacent and altogether new industries, and thereby blur the distinctions between them (much to competition regulators’ dismay). However, you’d need a crystal ball and a lot of luck to narrow down on just one single winner. Another strategy might be to back companies with indirect exposure AI. One group of companies that fits the bill are in the semiconductor industry: they sit “upstream” in the supply chain and provide microchips to the aforementioned tech giants. Global leaders in this space include Nvidia, Intel, Micron, and Qualcomm.

Alternatively, of course, you could look to the myriad ETFs and active funds focused on the AI opportunity. A few high-profile funds include the Amundi Stoxx Global Artificial Intelligence UCITS ETF, the Pictet Robotics fund mentioned previously, the AXA Framlington Biotech fund, and GAM Star Disruptive Growth.

In this Pack, you’ve learned:

  • Rising competition as well as demanding investors and investors are all responsible for the accelerated uptake of automation – and high profile investors are already betting big on its potential
  • Allied Market Research predicts the market for factory automation will grow an average of 9% a year until 2025 – almost triple the rate of the global economy
  • Statista forecasts the global robotics market – a major subset within automation – will grow from $39 billion in annual revenue in 2017 to $500 billion in 2025
  • McKinsey reckons 70% of companies will be using at least one type of AI by 2030, and Morgan Stanley forecasts the AI industry will generate $1 trillion in annual revenue by 2050
  • The automation trend is one you can invest directly in – either by betting on individual companies or by spreading the risk across several through ETFs or actively managed funds

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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