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With automation reducing the costs of onshore manufacturing and logistics, robotics could be a key beneficiary even in the post-pandemic world.Jim Tanner/Reuters

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The convergence of several disruptive themes is upending many long-standing industries and creating an unprecedented opportunity for investors in 2022.

The year started with lingering supply chain issues, rising energy prices, and higher inflation expectations. Russia’s invasion of Ukraine could also create wide-ranging implications for global economies and markets, beyond exacerbated energy and inflation concerns.

Investors will likely be more selective in the stock market this year, focusing on valuations, fundamentals and quality.

Therefore, understanding the market landscape as well as which themes will have strong catalysts for further adoption in the near term may be key for thematic investors.

Here’s a look at three sectors that will benefit from the current and future evolving environment.

Use of robotics will continue to rise

COVID-19-related supply chain disruptions have prompted more manufacturers to consider onshoring or reshoring their business. An estimated 628,000 manufacturing jobs were reshored in the U.S. from 2010 to 2019, according to research firm Reshoring Initiative. The pandemic has accelerated this trend markedly. In 2020, reshoring brought back roughly 110,000 jobs to the U.S., and 2021 is likely to set a new record of more than 138,000 jobs. With automation reducing the costs of onshore manufacturing and logistics, robotics could be a key beneficiary even in the post-pandemic world.

Rising wages and labour shortages also add to the near-term appetite for automation technologies. U.S. government data showed hourly earnings rose 5.1 per cent in February from a year ago – marking four of the past five months in which annual wage gains were greater than 5 per cent. Meanwhile, robotics costs continue to fall as robots and the artificial intelligence (AI) algorithms powering them become smarter and more capable.

There could be more demand for robots as countries with low robot density play catch up. For example, South Korea has a robot density – the number of robots per 10,000 manufacturing workers – of 932, while the U.S. stands at 255.

When it comes to making robots, Japan is a veritable superpower, accounting for 47 per cent of global robot manufacturing as of 2020. Fanuc Ltd. FANUY, Yaskawa Electric Corp. YASKY, Kawasaki Heavy Industries Ltd. KWHIY, Daifuku Co. Ltd. DFKCY, and SMC Corp. SMCAY are a few examples of renowned Japanese companies in industrial robotics.

EVs charge ahead with more demand for lithium

The automobile industry is on the cusp of an inflection point decades in the making as electric vehicles (EVs) finally accelerate into the mainstream.

The high cost commonly associated with EVs could soon come down thanks to the shift to a lower-cost type of battery. In October, Tesla Inc. TSLA-Q announced plans to change the battery chemistry in all its standard-range EVs globally to a version with a lithium-iron-phosphate (LFP) cathode. While nickel-based lithium-ion batteries offer the longest possible range for luxury EVs, the older, more robust, and less expensive LFP batteries are likely to fuel mass-market adoption.

Tesla’s not alone to lean on LFP batteries for lower input costs. Other like-minded major automakers include Ford Motor Co. F-N and Volkswagen AG VWAGY. The comeback of LFP batteries signals that the target market for EVs is making the transition from high-end consumers to the mass market.

By our estimates, EVs will likely reach price parity with internal combustion engine vehicles by 2024 – most likely between 2022 and 2023 – driven primarily by falling battery costs.

Furthermore, traditional automakers are increasingly committing to electrifying their fleets. Within the past year, General Motors Co. GM-N, Stellantis NV STLA-N, Ford, and others have committed billions to an all-electric future. All EV roads lead to lithium miners and battery producers. Given all the ambitious plans to build more EVs, and the underinvestment in lithium mining in the past few years, it’s likely to result in a lithium deficit in 2022 for the first time in at least seven years. And conditions will worsen over the next few years.

New lithium mining operations can take three to five years to complete, making the near-term undersupply situation almost inevitable. Lithium miners such as Albemarle Corp. ALB-N and Sociedad Química y Minera de Chile SA SQM-N, and EV battery makers such as Contemporary Amperex Technology Co. Ltd., are all key upstream players in the EV ecosystem.

Infrastructure development in the U.S.

In November, U.S. President Joe Biden signed the US$1.2-trillion bipartisan infrastructure bill into law. The Infrastructure Investment and Jobs Act includes US$550-billion of new spending over 10 years across a wide range of infrastructure initiatives needed to position the U.S. for the future.

You could unpack the U.S. infrastructure development theme into four subthemes:

  • Construction and engineering services: Companies like Jacobs Engineering Group Inc. J-N can provide construction and engineering services from end-to-end.
  • Products and equipment: Hubbell Inc. HUBB-N, for example, is a products and equipment company that manufactures electrical products used across diverse end-markets and settings.
  • Raw materials and composites: Raw materials and composites companies such as Insteel Industries Inc. IIIN-N, which manufactures reinforcing steel wiring, provide the critical ingredients that form physical infrastructure assets.
  • Industrial transportation: Delivering the requisite products, equipment and raw materials, composites by rail and road, industrial transportation companies like Union Pacific Corp. UNP-N are essential enablers of U.S. infrastructure development.

It’s important to note that infrastructure spending is not instantaneous, nor are the benefits. Only over time does spending translate to revenue, economic growth, and social impact.

In the near term, projects must undergo extensive planning and review before construction. This early phase could mean revenue for consultants and infrastructure specialists, or large companies that can offer end-to-end solutions from planning to the build.

Jon Maier is chief investment officer and Warner Wen is director of Canadian institutional coverage at New York-based Global X ETFs.

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