Three ways to invest in electric vehicles over the next decade

Sam Slator 01/03/22 in Strategy

The countdown has begun! The UK Government has declared sales of new diesel and petrol cars will be phased out by 2030 in a move expected to fast-track the electric car revolution.

We are on track for mass adoption of zero emission vehicles over the course of this decade, according to its report: ‘Transitioning to zero emission cars and vans: 2035 delivery plan’.

“This will help deliver carbon reductions, improved air quality and secure a green recovery as we build back better from Covid-19,” it stated.

It’s also expected to increase the opportunities to invest in electric cars. The next few years are likely to see significant changes to this marketplace. So, let’s take a look at what’s been happening.

The growth of electric cars

The electric vehicle industry is certainly taking off. Sales figures from the Society of Motor Manufacturer and Traders (SMMT) declared 2021 a record year for zero and ultra-low emission vehicles.

In fact, more new battery electric vehicles (BEVs) were registered than over the previous five years combined, with 190,727 hitting Britain’s roads*. They were joined by a further 114,554 plug-in hybrids (PHEVs)*. This means 18.5% of all new cars registered in 2021 can be plugged in*.

The rapid pace of change is underlined by forecasts that BEVS and PHEVS will grow by 61% and 42%, respectively, in 2022*. It means by the end of 2022, almost one four new cars could come with a plug*.

According to Mike Hawes, SMMT chief executive, electric vehicles are driving the growth in new cars – despite the ongoing headwinds of chip shortages, rising inflation, and the cost-of-living squeeze. “With around 50 new electrified models due for release this year, customers will have an ever-greater choice, which can only be good for our shared environmental ambitions,” he added.

Invest in electric vehicles

This increased enthusiasm for electric cars is also likely to make this growing sector even more attractive to would-be investors. After all, it’s extremely rare to have a situation when Government legislation is being introduced that will help support the growth of an entire industry.

But how can people invest in electric cars? What are the best ways of getting exposure to this area and benefitting from this once-in-a-generation shift?

Should we be putting money into electric car manufacturers, the suppliers of parts needed to build these vehicles, or in other parts of the renewable energy story?

Here, FundCalibre takes a look at the various electric car shares and electric vehicle funds that could benefit over the next decade from this regulatory overhaul.

Tesla

One of the biggest names on the planet when it comes to electric car stocks is Tesla. Elon Musk’s innovative company has developed a fleet of eye-catching, futuristic models. The manufacturer is one of the largest positions on the Scottish Mortgage Investment Trust, with a 5.3% share of the portfolio’s total assets**.

Tesla is also a prominent name in the top 10 holdings of both the Baillie Gifford American fund and the Baillie Gifford Global Discovery portfolio**. The most recent quarterly update for the Global Discovery portfolio noted “decent period of execution” from Tesla, which is starting to realise “the benefits of scale” in its manufacturing.

Market cap increase

Investors in Tesla have had an enjoyable ride in recent years. The stock rose almost 70% during 2021, in a year which saw its market cap break through the $1tn mark. While the price has come off since then, the company is regarded as a leading name among electric vehicle shares, which are also known as EV stocks.

In a broker note issued in late 2021 by JP Morgan, analyst Ryan Brinkman, branded its products “bold, distinctive, elegant, and highly entertaining” to drive. “The company is led by visionary leadership, backed by a management team with solid functional strength,” he added.

In its recently published full-year update, Tesla declared that 2021 had been a “breakthrough year” for the company, with deliveries up 87%. “There should no longer be doubt about the viability and profitability of electric vehicles,” it stated.

However, the electric vehicle story doesn’t begin and end with Tesla. There are plenty of other EV stocks that investors – and fund managers – are keeping an eye on.

NIDEC

If you believe electric vehicles will replace those powered by petrol over time, there are opportunities, according to Richard Kaye from the investment team of Comgest Growth Japan. “NIDEC here in Japan is probably one of the most exposed companies to that story,” he told a recent webinar. “You don’t have to go with Tesla.”

The aim of the fund is to create a portfolio consisting of high quality long-term growth companies headquartered or carrying out their predominant activities in Japan.

“You don’t have to go with the pure play automobile companies that still have 90% of their business in traditional engines,” he added. “NIDEC is already the dominant supplier of electric (motors).”

He is also confident about its future prospects. “It’s got five or six launch automobile players that it’s partnering with and we expect that universe of NIDEC electric (motor) exposure only to increase over time,” he added.

Value in electric vehicle value chain

Zehrid Osmani, manager of FTF Martin Currie European Unconstrained, has long been a fan of the investment opportunities surrounding electric vehicles. While far from being solely an electric vehicle fund, the portfolio takes advantages that this broader area has to offer investors. Zehrid also takes a particular approach.

“In the gold rush of the 1840s, it was the sellers of picks and shovels, not the miners that made the best returns,” he said. “It could be the same story for investors seeking the best returns from this monumental shift to EV.”

This is why he embraces a wider search area for holdings. “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,” he explained.

Infineon has benefitted

Zehrid 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 two years ago, we estimate there were around US$350 worth of semiconductors (mainly for safety). This number goes up to US$950 for an EV/hybrid.”

Semiconductors play crucial role in automobile industry

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.”

Move towards decarbonisation using electric vehicles

The Ninety One Global Environment fund was launched in December 2019 and it has a unique approach that sets it apart: it targets companies that contribute to positive environmental change through decarbonisation. This means the process of reducing carbon dioxide emissions. As a result, the move towards embracing electric cars falls under its remit.

According to Deirdre Cooper, who manages the portfolio with Graeme Baker, it’s an important period in the move towards decarbonisation. “We will likely look back at the present period as a watershed in the mass adoption of electric vehicles,” she said. “Global EV sales – EVs and plug-in hybrids – grew by over 100% from 2020 to 2021 (according to Canalys) to 6.5 million, compared to just 4% growth in the total global car market.”

Enthusiasm for electric vehicles

Deidre also pointed out that more than three million were sold in China, representing 15% of new cars sold, while in excess of two million were bought in Europe (19% of new cars) over 2021.

“Attitudes towards EVs seem to have reached a tipping point, partly because of technological advances – though the pandemic may also have contributed – with many consumers seemingly more mindful of the environmental impacts of their purchasing choices,” she added.

Next cars will be electric

Deidre also highlighted Ninety One’s recent Planetary Pulse survey that saw 58% of those surveyed saying it was likely that their next car would be a pure electric model.

“Although there are several new players entering the auto sector and incumbents recognising that electrification is key to their survival, instead of trying to predict who might emerge as the leading automaker, our focus to date in gaining exposure to the transition to EVs has been through the sector’s supply chains and related industries,” she explained. “In our view, the upside case in these companies is less well appreciated by the market, (so offers) more potential for outperformance.”

*Source: SMMT, 6 January 2022
**Source: fund factsheet, 31 January 2022

This article was originally published 19 November 2020 and updated on 1 March 2022.

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