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With the ban on sales of new diesel and petrol cars having been brought forward to 2030 in the UK, the electric vehicle investment opportunity has been accelerated. Already an attractive area, investors are now also enjoying a rare moment in history where an established market is being legislated to shift rapidly from one technology to another in a very short time frame.
But how best to invest? In the cars, in the parts or in their renewable energy?
Here, FundCalibre outlines three funds looking at different areas of the electrification opportunity.
Tesla is the world’s largest electric vehicle maker. Set to join the S&P 500 index of leading US stocks next month, it has been a holding in the Scottish Mortgage Investment Trust since 2013 and today is its biggest holding.
Commenting in the latest interim report, the managers said: “The era of electrification that Tesla is helping to materialise will take decades to arrive and have far-reaching consequences. Technological progress is driving down costs along an exponential curve that the fossil fuel industry will be unable to match. It is challenging to predict the impact of such change on the complex system that is the global economy. We eschew prediction and prefer to partner with the entrepreneurs that are driving change.
“Encouragingly, we are seeing more opportunities. Chinese electric vehicle producer, Nio, has endured difficult trading conditions since its IPO in late 2018 but its business is back on track and its balance sheet has been strengthened by continued investment from its founder and through local government support.
“In the period we invested in Northvolt, a company which will be critical to the creation of European battery manufacturing capacity. Its access to cheap hydroelectric power in Swedish Lapland should give it a cost advantage as the industry grows rapidly. We also made a commitment to ChargePoint, one of the world’s largest electric vehicle-charging networks.”
Zed Osmani, manager of this focused, high conviction portfolio of quality growth European equities, has long been a fan of the investment opportunities surrounding electric vehicles, but he pointed out: “In the 1840s gold rush, it was the sellers of picks and shovels, not the miners that made the best returns. It could be the same story for investors seeking the best returns from this monumental shift to EV.
“Rather than the original equipment manufacturers (OEMs), the real value is more likely to be found further up the value chain, in niche sub-segments where competitive pressures are lesser, barriers to entry are higher, and therefore pricing power is stronger, leading to higher return profiles.”
Zed pointed to Infineon, the German semiconductor company and a top ten holding, as being a notable beneficiary of the transition towards EV/Hybrid and autonomous cars. “Infineon is benefiting from the increased use of semiconductors in cars – in a high-end car today we estimate there are around US$350 worth of semiconductors (mainly for safety); this number goes up to US$950 for an EV/Hybrid.”
He also cited chipmakers as an opportunity, given the increased need for more chips in cars to power the whole technology and connectivity. “Dutch firm ASML has an enviable position as the key supplier to the major semiconductor-chip suppliers for these growing markets,” he said. With a strong market position and close relationships with customers, the company is critical in enabling innovation and development in the semiconductor industry.
Hear more about this on this video interview:
Launched in December 2019, Ninety One Global Environment is a global equities fund that has a unique approach of only investing in companies that are contributing to the decarbonisation of the world economy. As well as avoiding creating carbon emissions, firms will also have to have at least 50% of their revenues from three sectors: renewable energy; efficient use of resources, and electrification.
Co-manager Deirdre Cooper said: “We were heartened to see the UK government increase its commitment to decarbonisation yesterday. In particular, we were encouraged by the commitment to ban the sale of internal combustion engines (ICE) by 2030. In some ways this only reinforces an existing trend, given in the month of October more electric vehicles (EVs) were sold in Europe than diesel cars for the first time in history.
“We believe we are entering a self-enforcing downward spiral for ICE cars that is getting steeper and steeper, and a commensurate tipping point in EV growth. This is a theme where we believe investors need to be incredibly careful in choosing winners. Every OEM and automotive supplier will claim to be positively levered but not all are; some of the future winners are Asian technology companies that currently play little or no role in the automotive supply chain.”