Regulatory measures targeted at reducing carbon emissions and improvements in battery technology mean the electric vehicle industry is enjoying significant tailwinds. However, for many investors it remains a niche area that can be difficult to access.
Yet, that does not mean they should overlook the growing opportunities to be found in the electric vehicles space.
The revolution in the automobile sector is nothing less than a “paradigm shift” that can no longer be ignored, according to PGIM’s vice president of investment grade credit research John Smigelsky and high yield credit research principal Gary Stromberg.
“While electric vehicles represent only a small fraction of the current market, sales are expected to grow at a meaningful rate, which will require significant investment from automakers and suppliers,” they said.
“The global auto industry plans to spend in excess of $250bn to develop more than 200 electric models globally by 2023, while close to 30 per cent of global new car sales will be electric vehicles by 2030.”
Source: International Energy Agency
The pair noted that analysts are forecasting that electric vehicles could achieve total cost breakeven with conventional cars “in less than five years”.
This is quite simply “the way that the car industry is changing from oil to electric”, according to Skerritt Wealth Management’s head of investments Andrew Merricks.
“If it is as I imagine,” Merricks said, “it will affect everyone globally, as it is a fundamental change to a part of our everyday life.”
The major limiting factor in the growth of the electric vehicle industry thus far, said PGIM’s Smigelsky and Stromberg, is battery technology.
“We believe full-battery electric vehicle adoption could occur more quickly if battery technology improves and costs decline faster than expected,” they noted.
The importance of battery technology for electric vehicles and the materials needed to develop them does give investors one way of accessing the trend, however.
“The biggest story here is about nickel,” said Aneeka Gupta, associate director of research at ETF provider WisdomTree Investments. “The most dominant battery technology out there is based on NMCs [nickel, magnesium, cobalt], which are used in the cathodes of a battery.
“When the battery first came out,” she explained, “it used equal proportions of nickel, magnesium and cobalt. But now, manufacturers are moving towards a newer version which would require higher amounts of nickel [nearly eight parts of nickel to one part of magnesium and one part of cobalt].”
World nickel mine production trends
Source: International Nickel Study Group
WisdomTree’s Gupta gave two reasons behind the preference for nickel: one, it is a lot lighter, has greater efficiency over longer distances, and is easier to use in manufacturing.
The other reason is that manufacturers want to reduce their dependence on cobalt, by using nickel as a substitute. More than 50 per cent of cobalt is mined in the Democratic Republic of Congo, a war-torn country subject to a lot of risk.
“This much higher use of nickel will eventually increase the demand for, and the price of, nickel,” she said.
While gaining exposure to the materials needed to support the electric vehicle revolution is one way to play the trend, there are other methods that don’t require investing in the volatile commodities space.
Indeed, Skerritts’ Merricks sees potential opportunities throughout the changing automotive ecosystem.
“My thoughts about opportunities are what lie in the production of electric vehicles, but also in the supply chain and possible other beneficiaries, such as logistics,” he explained.
His favoured way of playing the theme within a portfolio would be to seek out exchange-traded funds (ETFs) in these areas, noting that although “they are not many at present,” there are a handful of themes that he will continue to monitor: future mobility, electric vehicles and battery value chain.
Merricks’ first ETF pick is Xtrackers Future Mobility UCITS ETF, which provides diversified exposure to up to 100 stocks which have exposure to themes linked to future mobility from global developed and emerging markets.
Secondly, iShares Electric Vehicles and Driving Technology UCITS ETF seeks to capture not just direct beneficiaries of the trend such as auto manufacturers, but also the upstream effects by investing in suppliers to the companies changing the way we drive.
Finally, the L&G Battery Value-Chain UCITS ETF tracks the performance of the Solactive Battery Value-Chain index, a basket of companies that are providers of certain electro-chemical energy storage technology (i.e. battery technology) or mining companies that produce metals primarily used for manufacturing batteries.
The drive to electrification is also paving the way for another interesting trend in the automobile industry: autonomous vehicles.
“Advancements in ride-sharing and autonomous technology could fundamentally reshape the consumer’s relationship with the automobile,” said PGIM’s Smigelsky and Stromberg, who believe that there could be as many as 20 million driverless vehicles by 2040.
“Vehicles in the US sit unused about 95 per cent of the time and are inefficient when they are used – as less than 30 per cent of the energy from fuel is used for propulsion," noted the pair.
“If these inefficiencies can be reined in, driverless electric vehicles designed for shared transportation service in the US could reduce out-of-pocket and time costs by 80 per cent.”
However, Skerritts' Merricks expressed concerns about the high risk of backing start-ups in this fledgling area.
“As an investment opportunity it is relatively young, and therefore quite risky as the failure rate will tend to be quite high,” he said. “My advice to potential investors: don’t get spellbound by what may interest you personally. It’s a young market and an expensive one to develop into.”
Meanwhile, the major global automakers and suppliers are leaving nothing to chance, Smigelsky and Stromberg noted, “investing in virtually all areas of the transportation ecosystem as the future begins to take shape”.
Urging caution, Smigelsky and Stromberg concluded that “while it is much too early to pick the winners and losers in these emerging technology fields, the coming changes to the industry are also impossible for investors to ignore”.