Robotics Unleash Further Creative Destruction Into Financial Services & ManufacturingMay3

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Daily Intelligence Briefing – May 2, 2018

FEATURED TOPIC: ROBOTICS UNLEASH FURTHER CREATIVE DESTRUCTION INTO FINANCIAL SERVICES & MANUFACTURING

In the 9 months since MRP added Long Robotics & Automation as a theme, advances in cloud computing, artificial intelligence, Robots as a Service (Raas), and the Internet of Things (IoT) have taken robotics to a whole new level, further unleashing the forces of creative destruction on manufacturing and services businesses around the world.

One industry experiencing significant disruption these days is financial services. Not only are robots conquering wealth management through AI, they are also about to transform retail banking and possibly even the corporate advisory sector.

WEALTH MANAGEMENT: Ever since robot advisors were introduced as industry disruptors in 2008 by firms such as Betterment and Wealthfront, they have steadily captured market share from their human counterparts, in the same way that Amazon and Netflix have eaten into the share of Walmart and Regal Cinemas. Consulting firm Deloitte estimates that “assets under automated management” (yes, “AUAM” is now a thing) in the U.S. will grow to $5-$7 trillion by the year 2025 from about $300 billion today and $100 billion in 2016. That would represent between 10% and 15% of total retail financial assets under management, which is why traditional retail investment giants Schwab, Vanguard, Morgan Stanley, BlackRock, and others have rushed to develop their own robo-advisors.

CONSULTING: The trillion-dollar corporate advisory industry seems ripe for the same type of disruption, per Harvard Business Review. When corporations buy advice from human advisors, these advisors — be they consultants or investment bankers — usually take a data-driven approach, guided by previous experiences and past corporate data, to come up with solutions. As it turns out, the volume of worldwide corporate data has exploded thanks to cloud computing. It is doubling every 14 months and will reach 10.5 ZB by 2020. The availability of all this data – which is both financial (revenues, profits, growth) and non-financial (customer sentiment, employee engagement, marketing effectiveness, product feedback, and partner ecosystems) – is great fodder from which machine learning intelligence can glean valuable insights helpful for solving complex problems.  

Such data will enable “robo-consultants” to deliver highly-predictive, error-proof, and algorithm-based advisory services at a low cost to smaller companies that cannot afford the investment banks. Many believe it’s only a matter of time before the $60 billion consulting industry in the U.S. is disrupted by such corporate robotic advisors which will take business away from the likes of McKinsey, Deloitte, & Bain – unless, of course, they develop their own robo-consultant divisions. And because the costs of AI-enabled tools are falling and availability is rising, it won’t be long before AI-as-a-Service (AIaaS) also becomes a thing.

RETAIL BANKING: China Construction Bank (CCB), China’s second largest lender by assets, has launched the first bank branch managed by AI robots. This self-service branch, which runs on a combination of facial recognition, artificial intelligence and virtual reality technologies, provides a range of services, including opening accounts, money transfers, foreign exchange, and a few investment offerings. Additionally, QR codes on screens allow consumer to pay for products & services while VR machines showcase the bank’s latest home rental offerings. CCB officials say the robo-bank can handle 90% of the cash and non-cash demands of traditional branches.

As exemplified above, physical robots continue to penetrate all sorts of fields these days, with 1.7 million new industrial robots projected to be in operation by 2020. They are at work in a wide range of areas including defense, healthcare, construction, agriculture, and of course manufacturing.

ROBOTS-AS-A-ERVICE (RaaS): But, even within manufacturing, robots are still out of reach for most firms because of the significant upfront investment required to acquire one. These costs can range from $30-60K for collaborative robots to 120K for industrial robots. Now, several startups are looking to democratize access by turning what’s been a capital expense into an operating expense. Companies such as Hirebotics and Ready Robotics allow any manufacturer, large or small, to hire a robot for its factory, with the same ease as hiring an employee. The RaaS model is gaining popularity, as it allows businesses to test automation with little risk.

The “Subscription Economy” first took off when software service providers such as Salesforce, Zendesk, and Adobe introduced Software as a Service (SaaS). Next came subscription-based digital entertainment services such as Netflix and Spotify which disrupted media, and Uber and Lyft which disrupted transportation. Now, the subscription model is about to revolutionize manufacturing thanks to the emergence of Robots as a Service (RaaS).

Another fascinating development is the emergence of companion robots, which fall in the realm of social robots.

SOCIAL ROBOTS: In India, a companion robot called Miko engages, educates, and entertains children above the age of five. Miko, weighing 750 grams and measuring a foot in height, can talk to and play games with kids. It also answers questions related to general knowledge and academics, and responds to non-verbal cues like motion and physical gestures to incorporate emotions as well. Social robots like Miko, which retails for Rs19,000 ($280) in India, could eventually capture market share from tablets and computers. Another social robot, Ipal, serves as a companion for elders living alone. Ipal, created in China, can be programed to aid in medication compliance, medical monitoring, and to provide other assistance around the house, helping elderly citizens live independently longer.

The pace at which the robotic revolution is disrupting services and manufacturing businesses around the world continues to amaze our team at MRP. One general metric that might be of interest to investors is robot density, which is rising globally. In 2016, there were 74 robots for every 10,000 employees globally, up from 66 units the previous year, and that number will only accelerate. By region, the average is 99 units per 10,000 workers in Europe, 84 in the Americas, and 63 in Asia. Countries with the highest density are South Korea with 631 robots per 10,000 employees, Singapore with 488, Germany with 309, Japan with 303, and Denmark with 211.

Not surprisingly, the pace of automation as measured by robot density is slower in highly populated countries such as the United States with its density rate of 189, China with 68 and India with 3 industrial robots per 10,000 workers. These economies also happen to represent the greatest opportunities when it comes to the robotic revolution.

MRP added Long Robotics & Automation as a theme on July 20, 2017. Investors can gain exposure to the theme via the Robo Global Robotics & Automation Index ETF (ROBO) or the Global X Robotics & Artificial Intelligence ETF (BOTZ).

HERE IN THE MEANTIME are some articles relating to this featured topic (the stories are summarized in the TECHNOLOGY section of today’s report):

• Robots – Starship Technologies launches autonomous robot delivery services for campuses.
• Robots – Seven Jobs Robots Will Create—or Expand.
• Robots – The Countries With The Highest Density Of Robot Workers.
• Robots – Three IIT graduates have created India’s first robot buddy for kids.
• Robots – Robots begin takeover of travel and tourism industry
• Robots – China Construction Bank opens a branch only managed by AI robots

CHART:  Robotics & Automation EFTs (ROBO, BOTZ) vs S&P 500 ETF (SPY

OTHER DISRUPTIVE CHANGE:

• Markets:
  • Bond-Equity Correlations – New correlations spell concern for bond and equity investors.
  • FX – The Dollar’s Rebound Is More Mystery Than Economics.
  • Cryptocurrencies – Bitcoin has ‘elements of all of the different asset classes,’ CFTC chairman.
  • Stocks – US stocks unmoved by soaring corporate earnings.
• Economics and Trade:
  • Brexit – U.K. Proposes Solution to Brexit Deadlock Over Irish Border.
  • Capex – US groups plough tax cash into capex ahead of investors.
  • Tariffs – US delays steel, aluminum tariffs until June.
• Finance:
  • Banks – The Biggest Banks Are Gobbling Up Deposits. Here’s Who’s Not.
  • Banks – Emboldened by Trump, banks push to throw off old rule constraints.
  • Exchanges – Australia’s Biggest Stock Exchange Targets Blockchain Integration in 2020.
  • Payments – How India Will Leapfrog Plastic Payments.
  • Trading – A Goldman Trading Desk That Once Had 500 People Is Down to Three.
• Real Estate:
  • CRE – The industrial warehouse space market is nowhere near its peak.
  • CRE – Mall Owners and Retailers Clash Over Avalanche of Online Returns.
• Services:
  • Video Gaming – Games market expected to hit $180.1 billion in revenues in 2021.
• Technology:
  • AI – The AI arms race: China and US compete to dominate big data.
• Transportation:
  • Aerospace – Blue Origin sends New Shepard space capsule to its highest altitude yet.
  • EVs – Nissan LEAF Amazes In EV Sales Record Storm.
  • Rail – Freight Railroads Get Boost from Tight Trucking Markets.
• Commodities:
  • Refineries – Surging Fuel Demand Prompts Marathon Petroleum’s $23 Billion Deal.
• Biotech:
  • Pharma – Bipartisan group pushes opioid action plan.
• Endnote:
  • CRE – U.S. Industrial Real Estate Cycling Up.

JOE MAC’S MARKET VIEWPOINT

• Joe Mac’s Market Viewpoint: A Review of MRP Themes
• Joe Mac’s Market Viewpoint: Beyond the HOUSING HEADWINDS
• Joe Mac’s Market Viewpoint: The Coming Value Rotation
• Joe Mac’s Market Viewpoint: Beyond the BOND BUBBLE
• Joe Mac’s Market Viewpoint: Contrarian Crude Call

CURRENT MRP THEMES

About the DIBs: MRP focuses on identifying transformational change in the global economy and offering an investment thesis whenever an opportunity arises that has not yet been recognized by the market. The DIBs are MRP’s compilation of articles and data from multiple sources on subjects reflecting disruptive change that have potential investment implications for an industry or group of securities. We share these with our clients who may already have or may be considering exposure in the industries affected. The subjects change daily and constitute an excellent update on featured topics. 

Dollar Extends Gains to New 4-Month High

The dollar index rose further by 0.6% to 92.44 around 11:30 AM New York time Tuesday, its highest level since January 9th, as investors await the Fed’s policy decision on Wednesday and the US jobs report due later in the week for hints of a rate hike in June.

The pound fell as much as 1.3% to $1.359; the euro sank 0.7% to $1.199; and the Japanese yen dropped 0.4% to ¥109.73 against the dollar. TE

US Manufacturing Growth Eases to 9-Month Low: ISM

The Institute for Supply Management’s Manufacturing PMI in the US fell to 57.3 in April 2018 from the previous month’s 59.3, and missing market expectations of 58.3. The reading pointed to the weakest pace of expansion in the manufacturing sector since last July, as new orders, production and employment rose at softer rates. TE

US Construction Spending Unexpectedly Falls in March

Construction spending in the US dropped 1.7 percent month-over-month to USD 1.28 trillion in March of 2018, following an upwardly revised 1 percent increase in the previous month and missing market expectations of a 0.5 percent gain.

Spending on private construction dropped 2.1 percent to USD 987.5 billion, the largest fall since January 2011 and following an upwardly revised 1.2 percent increase in February. Outlays on private residential projects plunged 3.5 percent, the biggest drop since April 2009, and spending on nonresidential structures slipped 0.4 percent. Investment in public construction projects was unchanged in March after edging up 0.1 percent in February. TE

Greece 10Y Bond Yield Hits 12-year Low

Greece 10 Year Government Bond Yield decreased to a 12-year low of 3.865%. TE

Crude Oil Prices Falling

Crude Oil decreased by 2% to 67.237 USD/Bbl. TE

Bond-Equity Correlations – New correlations spell concern for bond and equity investors

Investors are starting to see a pattern in the bond-equity relationship that could have profound and worrying implications for their portfolios. The rare combination of equity and bond prices falling at the same time has become more frequent of late. Since 2000 there have only been 57 trading days where the S&P 500 lost 0.5 per cent or more and the 30-year US Treasury bond yield also rose 3 basis points or more, according to Morgan Stanley. But there were a handful of such days in just the last month.

This could have significant implications for a lot of investors that depend on bonds and stocks to counteract each other. Accelerating inflation eats directly into fixed income returns and indirectly threatens the bond market by spurring central banks to raise interest rates more aggressively.

Gene Frieda, a strategist at Pimco, does not foresee inflation becoming a real problem but worries that rising bond-equity correlations could prove particularly problematic for balanced portfolios that use leverage to boost the returns of fixed income. Given that low bond yields will regardless crimp the protection they offer, and the muddled outlook for commodity prices, Morgan Stanley’s Andrew Sheets argues investors should explore other cheap diversifiers — such as bets on more volatility.

Nonetheless, if the two biggest corners of the global financial markets suffer a unison reversal then the damage could be severe. FT

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FX – The Dollar’s Rebound Is More Mystery Than Economics

The dollar is staging a comeback. Pundits are out in full force, suggesting this might finally be the end of the dollar’s recent weakness and the start of a strengthening trend that they have been predicting for more than a year. That may be right but finance has told us that nobody really knows what moves currencies.

The dollar plunged almost 20 percent against the euro and 10 percent against the yen in the 12 months following the Federal Reserve increasing interest rates in early in 2017. The dollar was becoming progressively overvalued; the real, trade-weighted value of the dollar surged 20 percent from 2011 to the end of 2016. That trend was unlikely to persist, irrespective of interest differentials, particularly as it also became clear by early 2017 that growth was accelerating in Europe, Japan and various emerging markets.

Trade and trade deficits also matter. The U.S. current-account deficit has begun to widen again, reaching $471 billion in 2017, or 2.4 percent of gross domestic product. Japan’s external surplus last year was 3.9 percent of GDP and the euro zone’s was 3.4 percent of GDP. Those imbalances create an excess supply of dollars relative to yen or euros. 

Whether or not the dollar’s recent bounce becomes a trend is anyone’s guess. The reality is that exchange rates are intrinsically more difficult to forecast than most other economic or market variables because they are driven by a myriad of factors that can’t be simplified into a simple rule of thumb. B

Cryptocurrencies – Bitcoin has ‘elements of all of the different asset classes,’ CFTC chairman says 

The ecosystem around bitcoin is still changing, but U.S. Commodity Futures Trading Commission Chairman J. Christopher Giancarlo said the popular cryptocurrency is part currency, part security and part digital coin. Giancarlo went on to say that there are certain aspects of bitcoin that look similar to an asset like gold.

The CFTC , as well as the U.S. Securities and Exchange Commission, Giancarlo pointed out, operate under rules and regulations that were established in the 1930s. In contrast, bitcoin, less than 10 years old, is still relatively new.

“At the end of the day, it’s for Congress, and not regulators, to decide whether new policies should be evolved for these new asset classes,” he said. CNBC

Stocks – US stocks unmoved by soaring corporate earnings

US companies are reporting their best profit gains in more than seven years and a record number are beating Wall Street forecasts. With just over half the S&P 500 having reported, the largest US companies are on course to show EPS growth of 23.2% from a year ago, the highest rate of growth since 3Q 2010. Meanwhile, 79% of companies reporting so far have beaten analysts’ forecasts.

But, the S&P 500 is up just 0.5% since earnings season got into full swing in mid-April, and shares of companies that beat forecasts are not rising as much as they typically do.

The muted response suggests that, against a backdrop of rising borrowing costs and other factors that could drag on profits, investors are beginning to worry that a turn in the business cycle may be in sight.

“There are some factors that could erode profits in the future,” said Mr Forester. “That is why you see some concern about wage growth, higher rates and increases in commodity prices. You have to wonder if we’re seeing the peak earnings growth rate.”  FT 

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Brexit – U.K. Proposes Solution to Brexit Deadlock Over Irish Border

Prime Minister Theresa May’s team of negotiators have drafted a new template for how the U.K. and the EU should work together to address the vexed issue of the Irish border.

The U.K.’s preferred solution — known as Option A — is to use a sweeping new free-trade agreement and customs deal with the EU to avoid the need for tariffs and goods checks at the border between the Irish Republic and Northern Ireland. Option B would be to use technological solutions and “trusted trader” schemes to minimize checks on goods at the border, under the British plan.

The EU insists there must be a “backstop” in case the U.K.’s plans don’t work — and EU officials in private say they expect the backstop will end up being used as they don’t think options A or B are feasible. B

Capex – US groups plough tax cash into capex ahead of investors

Corporate America is flush with cash after a blockbuster first-quarter earnings season and December’s Tax Cuts and Jobs Act, which included a deep cut in headline corporate tax rates. This has driven a better than expected 20 per cent increase in first-quarter capital spending.

For now, however, the investment revival appears to be concentrated in a few sectors: technology companies have led the splurge, with Google parent Alphabet reporting a jump in capital spending from $2.5bn to $7.3bn, including the cost of new offices in New York. Energy companies have been spurred to spend again by a rising oil price.

The median S&P 500 company expanded its investment spending by a more modest 13 per cent year on year, and just 10 companies accounted for two-thirds of the first-quarter increase in capital spending. Many businesses remained more hesitant about investing, the uncertainty stemming from threats of a trade war and geopolitical tension concerning treasury and finance executives.

The first US reporting season to show the impact of the tax legislation has been a standout, with Thomson Reuters expecting first-quarter earnings growth to approach 25 per cent, up from 15.3 per cent a year ago. But it has provided investors with a mixed picture of corporate confidence, four months after the passage of the biggest legislative changes to the tax system in a generation. FT

Tariffs – US delays steel, aluminum tariffs until June

President Trump on Monday issued two proclamations, providing Canada, Mexico and the European Union with an additional 30-day exemption to the proposed steel and aluminum tariffs. As of today, the U.S. has reached a deal with two of the top three sources of foreign steel: Brazil (in principle) and South Korea.

Only Canada remains as a top import source, but any deal there is tied to the lagging negotiations over NAFTA. Mexico is another top importer, but its fate is similarly tied to talks over a new North American trade deal. Of U.S. allies, then, only the EU is left without a clear path forward for exemptions as of the latest proclamation. But the group of nations has made its own hard line clear, threatening to retaliate in force with a ten-page list of tariffs, affecting more than $3 billion worth of products. SCDive

Banks – The Biggest Banks Are Gobbling Up Deposits. Here’s Who’s Not

In 2017, 10 of 22 major regional banks experienced declining U.S. deposits, compared with only two the year before. Others are still adding deposits, but at a much slower pace than recent years. As a group, the nearly two dozen regional banks added a net amount of roughly $55 billion. In contrast, the nation’s three biggest banks added a combined $118 billion in U.S. deposits last year.

The declines could mark the start of an important industry shift where deposits become less plentiful and Main Street banks do more to compete for them. Regional banks lack the national footprint of JPMorgan Chase, Bank of America and Wells Fargo, which attract consumers through their ubiquitous branch networks and flashy mobile-banking apps.

For years the Fed kept interest rates at historic lows and customers had few other choices about where to put their savings. Now, rising interest rates have given savers and businesses more alternatives to earn a yield on their money, and banks are preparing to fight each other for deposits.

Continued declines in deposits could pose a major challenge for regional lenders at a moment investors are otherwise bullish on their prospects. The banks are among the biggest winners of the new low corporate tax rates and the Senate recently passed a bill that would loosen their regulations.  WSJ 

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Banks – Emboldened by Trump, banks push to throw off old rule constraints

Emboldened by President Trump’s pledge to loosen laws introduced following the 2007-2009 global financial crisis, U.S. banks are pushing to scrap or revise more than a dozen other lesser-known rules they say are outdated, costly and hurt economic growth.

Many would have been revised a decade ago, but changes were shelved during the financial crisis and the fierce political battle over the 2010 Dodd Frank Act that imposed a new layer of restrictions.

With Congress now poised to pass the first rewrite of Dodd Frank backed by key Democrats, and as Trump-appointed regulators strike a much more industry-friendly tone, banks see the changing atmosphere as an opportunity for a sweeping overhaul. While promising considerable savings, most changes should be far less contentious than tweaking Dodd Frank, which aims to curb excessive risk-taking and predatory lending.

So far, the industry has gained traction on two laws they say are woefully outdated: the anti-money laundering rules outlined under the Bank Secrecy Act and the Community Reinvestment Act which requires lenders to extend credit to low-income communities where they take deposits. R

Exchanges – Australia’s Biggest Stock Exchange Targets Blockchain Integration in 2020

The Australian Securities Exchange (ASX) has said it will implement a blockchain-based post-trade system from as early as Q4 2020, replacing the current Clearing House Electronic Subregister System (CHESS) system. The ASX will use a new distributed ledger technology to manage the Australian financial market and will introduce 50 new features that will lead to cost reductions.

The new system will allow settlement participants on both sides of a bilateral transaction to pre-match the transaction earlier in the settlement period without committing the transaction for settlement. New York-based fintech company, Digital Asset is building DLT products, is the main technical partner for the initiative.

Migration testing will begin in Q2 2020 and will culminate with migration dress rehearsal weekends in preparation for go-live. CCN

Payments – How India Will Leapfrog Plastic Payments

Today, there are just 25 million credit cards in use across the Indian subcontinent. The number of merchants accepting plastic payments has remained static, while acceptance of other methods (Paytm in particular) have gained near ubiquity. The country is shaping up to leapfrog plastic-based payments altogether, with one of the most sophisticated payments systems in the world.

India has taken a few steps that have made this leapfrogging possible. First, authorities have brought more people into the formal financial system by lowering the bar on what it means to open a bank account. Second, the country has aggressively incentivized alternative payment methods. Third, a new category of financial services has emerged: payments banks.

Payments banks are not designed to take deposits, but they can provide essentially the same functionality — the difference is simply that the funds are stored with the central bank. People can access their funds by returning to the payments bank, so it looks and feels like a regular bank to the user, but it’s more protected due to the participation of the central bank.

Higher-profile companies are also playing a role. Products like Alipay and Paytm have become much more than just a payments mechanism; they are fully integrated solutions with banks. PYMNTS

Trading – A Goldman Trading Desk That Once Had 500 People Is Down to Three

Many Wall Street traders are concerned about being replaced by machines in the future, but at one Goldman Sachs Group unit it’s already happened.

“Equity trading: 15-20 years ago we had 500 people making markets in stocks. Today we have three,” Goldman Sachs President David Solomon said Monday.

The introduction of more technology into the trading business has made it more efficient for clients, while also introducing new risks. For Goldman Sachs, it has changed the mix of its workforce, as the bank has 9,000 engineers on staff and more employees are focused on regulation.

Goldman has an enormous investment in machine learning and, based on history, how markets will function. It makes speed much more important than capital. B

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