Electric cars have long been a tricky area for investors.
But now that the government has announced an end to conventional diesel and petrol powered car and van sales by 2040, we know that the revolution is coming.
The government also expects almost every vehicle on the road to be emission-free by 2050 in a move that’s seen as a major change for the motoring industry.
Can investors capitalise on the changes and increase their chances of enjoying strong returns over the next three decades?
So, what is happening?
The government is investing £2.7 billion into improving air quality, according to a report from the Department of Transport and the Department for Environment, Food & Rural Affairs.
The report, ‘UK plan for tackling roadside nitrogen dioxide concentrations’, states that £1 billion of this total will be invested into ultra-low emission vehicles.
This includes £100 million which will be ploughed into the UK’s charging infrastructure, as well as funding both the Plug-In Car and Plug-In Van grant schemes.
“The shift to ultra-low and zero emission vehicles is well underway, and will continue to gather pace over the coming years as we move towards 2040,” it stated.
“This shift will resolve our air quality problem as combustion engines gradually disappear from the streets of our towns and cities, some as soon as the early 2020s.”
The UK is already a leader in this area. In 2016, UK manufactured Nissan Leafs accounted for almost 20% of battery electric car sales across Europe and the UK also boasted the highest sales of battery electric vehicles and plug-in hybrids in the European Union.
What effects can we expect?
The changes are expected to result in a complete reinvention of the motor industry within the next 20 years, according to Ian Millward, a director of Candid Financial Advice.
“Alongside self-driving technology, the move to electric cars will be an enormous opportunity,” he said. “However, prospering from it is far from a given.”
The key issue, he points out, is the fact there are likely to be as many winners and losers, so making sure you invest wisely will be the key to success.
“Traditional car makers who fail to move with the times could go out of business, while petrol companies, engine manufacturers and oil companies could all suffer,” he said.
Millward argues that recognising such investment opportunities is the easy part.
“Prospering from it is much tougher and the repercussions of getting it wrong can be catastrophic,” he said. “The secret is to employ fund managers to make these decisions for you.”
Which stocks could be interesting?
Among the potential victims are major oil companies. In fact, how they respond to the threat posed by the low oil price and move to embrace electric cars will be key.
BP, for example, is understood to be in talks with electric vehicle makers on partnering to offer battery recharging docks at its global network of fuel stations. Royal Dutch Shell, meanwhile, has launched a pilot scheme to install battery charging docks at a few of its service stations in the UK and the Netherlands.
Companies in other sectors will benefit from electric cars – but many aren’t listed on stock markets, according to Michael Baxter, economics commentator at The Share Centre.
“Thanks to developments in renewable energy, the cost of electricity is likely to fall in the long term,” he said.
Baxter thinks this is beneficial to the electric car for two reasons.
Firstly, the cost of charging an electric car will fall, and secondly, in the era when climate change is likely to become ever more important, electric cars will be much kinder on the environment.
The second is that electric cars would have much greater synergy with self-driving cars than traditional cars.
“However, as the sale of autonomous cars rise we will see a fall in car ownership, with major implications for the car industry,” Baxter said.
Which ones are likely to benefit the most?
The three main sectors well positioned to capitalise on the electric car revolution are incumbent car manufacturers, technology bellwethers and auto suppliers.
That’s the view of fund manager Shaunak Mazumder and strategist Lars Kreckel of Legal & General Investment Management.
“Car manufacturers need to dramatically shift their manufacturing facilities to adapt towards electric or hybrid solutions,” they said in a recent study.
“They will also need to become more tech-focused, going beyond their traditional roles as manufacturers.”
If they can successfully transition, a few companies could become bigger and more profitable than before.
“Automotive supply companies are also well positioned to benefit by supporting manufacturers through the transition with practical electric and autonomous solutions,” they added.
“They can use product innovation to capture market share and leverage their position in the value chain.”
Mazumder and Kreckel also predict that the break-even point for electric vehicles will actually arrive sooner than the markets anticipate.
“Car manufacturers and analysts estimate that battery costs will continue to decline, moving closer towards cost parity with internal combustion engines (ICEs) over the next decade.”
In fact, they believe electric vehicles have the potential to follow the same path as smartphones.
“They have existed for less than a decade, and yet they have become an integral part of people’s lives across the world,” they added. “We expect electric and autonomous cars to do the same – bringing more capability and freeing up people’s time, with considerable social implications.”
The importance of lithium-ion batteries
Michael Baxter agrees that it will be the companies who are willing to change that will benefit the most.
“The winners are those who gain specialisation in the new technology early on – and the losers will be the companies that are slow to adopt electric cars,” he said.
Baxter highlights Glencore as a potential beneficiary. This FTSE 100 company is a diversified commodity producer which was founded more than 40 years ago.
“Ivan Glasenberg, the chief executive officer, has become a convert to the cause of lithium-ion batteries, but is focusing on the cobalt business in a three-way deal with Volvo and Chinese company CATL,” said Baxter. “Cobalt is a key component of lithium-ion batteries.”
Baxter also talks about Geely Holding Group, the Chinese auto company that bought Volvo seven years ago, as it has led the field in embracing new technology. “Volkswagen is also prioritising electric cars and rumours suggest it is planning to build a lithium-ion factory,” he added.
Thirdly, he believes Albermarle, the leading US speciality chemical company, is one to watch for being a leader in the mining of lithium and suggests any such list needs to feature Tesla, the US manufacturer of sporty electric vehicles.
“The inclusion of this North American company on the list is obvious but cynics overlook the key factors that make the company interesting,” he said. “When comparing market cap to sales it would appear to be grossly overvalued but Tesla is interesting.”
Baxter pinpoints the company’s involvement in not just electric cars but also clean energy generation and storage products as a reason for optimism.
“The cars are in effect a modern-day Trojan Horse as not only does the company make outstanding horseless carriages, it has found a way to create demand for its batteries,” he said. “Specialism in lithium-ion batteries is set to become very valuable, and Tesla has a big lead.”
Investment funds to consider
With so much uncertainty over which companies will benefit – and which will struggle to make strides over the coming years – the best route for many people is an investment fund.
The good news is there are specialist portfolios that focus on such developing technologies, according to Darius McDermott, managing director of Chelsea Financial Services.
“Technology disruption in the auto sector is a key theme in the RWC Global Emerging Markets fund and its manager, John Malloy, has exposure to different parts of the value chain,” he said.
Battery supplier LG Chem; Hota Industrial Manufacturing, a supplier to electric car maker Tesla; and BYD, which is the world’s biggest electric vehicle maker, are among its holdings.
McDermott also highlights the Baillie Gifford Global Discovery fund, managed by Douglas Brodie, which has invested in Tesla Motors for the past four years.
“The fund manager decided to buy into the electric car manufacturer because he could see the potential for electric vehicles to gain market share from traditional cars,” he said.
Stock selection focuses on growth companies that are trading at a reasonable price, with the managers drawing on the expertise of consulting firm RiceHadleyGates.
“This company, whose founders include former US Secretary of State Dr. Condoleezza Rice, helps identify sectors and themes to monitor.”
McDermott believes the automotive industry has reached an inflection point.
“This is not only due to the rise of the electric vehicle, but also the move towards automation and greater fuel efficiency for internal combustion engines,” he said.
Looking ahead, he expects there to be selective opportunities to invest in companies that provide the technology and components for driverless cars and electric vehicles.
“However, it is worth noting that the valuations of a number of stocks with exposure to the electric car market look highly valued, so I would urge investors to tread carefully,” he added.