Megatrends: Powering a New Automation Age

Since well before the Industrial Revolution, technology-forward companies have looked to automation for better ways to make and deliver goods and services. And while the golden age of robotics and artificial intelligence (AI) may yet be decades in the future, today it’s these sectors that hold promise for investors and companies alike.

What’s driving this trend? First, changing demographics. In the years ahead, automation will become a matter of necessity as shrinking working-age populations around the world drive companies to rely more on AI, machine learning and robotics to stay productive.

Another factor: declines in cost and accelerating developments in technologies that power automation—including the recent breakthroughs in generative AI programs capable of having human-like conversations, creating articles and even editing computer code. Now, after years of saving, many companies are primed to begin deploying capital into these technologies. 

My team at Morgan Stanley and I believe these trends are creating exciting new opportunities for investors, tied to both the companies enabling automation as well as those harnessing its power to maintain a competitive advantage. Here’s a closer look at the key factors we see driving this technology megatrend and how investors can benefit: 

Aging populations and, in many parts of the world, a shrinking labor supply will have a material impact on the global economy in the coming decades. According to the World Bank, Europe, Japan and China, for instance, are all forecast to see declines in their working-age populations over the next 20 years, and productivity gains will likely be necessary just to keep economic output from declining in these regions. Moreover, companies will likely find it increasingly difficult to source labor as the workforce shrinks. Stepping in to fill the gap? Automation. 

This shift is playing out differently in different parts of the world:

• Europe, by 2040, is projected to see its working-age population decline 13% from its 2020 levels, likely necessitating adoption of AI and automation technologies to offset potential productivity losses.

• Japan, home to many of the world’s leading robotics firms, has seen its working-age population shrink from a peak in the mid-1990s. Yet, thanks in part to advances in factory automation and robotics, GDP today has not shrunk along with the labor supply, because productivity has increased.

• China is facing similar demographic challenges over the next two decades as its population ages and its workforce declines. Already, China’s policymakers are emphasizing productivity through urbanization, renewable energy and continued dominance in manufacturing, all of which require investment in automation.

• The U.S., though its working-age population continues to grow, has been facing a persistent labor shortage that is driving companies to invest more in automation to boost productivity and offset rising labor costs.

Working Age Populations Are Forecast to Decline Outside the US

Though artificial intelligence, machine learning and robotics have been around for years, we’re hearing more and more about them now because the declining cost of computing has made widespread adoption of these technologies possible.

What’s driving costs lower? Improvements in computer hardware components such as semiconductors and the development of more advanced software play a big role. In addition, the rise of big data has made it easier and more affordable to “train” AI to properly interpret and process vast troves of information in the complex ways needed to power automation.

 A recent example is generative AI, by which computer algorithms use existing content to produce new content that appears as if it were created by humans. The technology has captured the world’s attention recently for its use in a highly sophisticated chatbot that responds to user questions with human-like answers.

Given the magnitude of computing power that is required to process this type of AI, significant investment will be needed to make the technology commercially or industrially scalable. However, we believe that with time and technological advancement, the breakthroughs in AI could help fuel economic activity and productivity growth in the decades to come. 

Historically, productivity gains in an economy tend to require a lot of investment by businesses—in things like software, equipment and machinery. The U.S., for example, saw a productivity explosion in the late 1990s and early 2000s, following a savings-fueled rise in capital investment in the mid-1990s. Now, after years of saving by businesses, we anticipate another boom of investment and productivity, with automation playing a central part. 

For investors interested in how their portfolio can benefit from a more automated world, there are a number of approaches to consider. Thematic exchange-traded funds (ETFs), for one, can provide broad exposure to both U.S. and global companies involved in automation across sectors such as technology, industrials and communications.

Those looking for specific companies to invest in may want to consider three key themes from our colleagues in Morgan Stanley Research:

• “Data Era” Beneficiaries: These are companies enabling or adopting data-harnessing technologies that will change how businesses collect, analyze and act on information to drive productivity growth

• Leaders in the “Second Machine Age”: Our strategists have identified these companies as being closely tied to rising industrial productivity, including those focused on industrial automation.

• “Deflation Enablers”: Although the AI industry is still in its early stages and generally not directly investible through public markets, there will likely be significant investment opportunities in the decade ahead. Look for opportunities with companies that are producing technologies to reduce business costs and increase productivity, particularly in automation and digitization, where barriers to entry are high.

We see compelling opportunities in both technology companies that are enabling automation as well as non-tech firms that are adopting automation to boost productivity and profits. Given recent high valuations in the tech sector, we are especially excited about the latter group—automation adopters—seeing them as under-appreciated potential beneficiaries of this technology megatrend. Your Morgan Stanley Financial Advisor can help identify opportunities that are right for you.

Find out more in our team’s AlphaCurrents report, “Revisiting ‘Automation by Necessity’ in Light of Recent Developments in Artificial Intelligence.” Connect with your Morgan Stanley Financial Advisor to learn more about how your portfolio can benefit from investment in automation.

• What are some ways to invest in companies that stand to benefit from adopting automation?   
• How should I consider positioning my portfolio toward emerging and potentially long-term trends like generative AI?