Revolutionary progress in the electric vehicle market is driving a surge in demand for advanced car batteries and related commodities.
The rise of electric vehicles and car battery manufacturers in emerging markets, present an exciting opportunity for investors. Concerns on climate change and the fuel economy are key drivers of this shift towards an economy fuelled by electric vehicles. Countries such as the Netherlands and Norway are undertaking initiatives to help eliminate air pollution and widen the use of EVs by committing to banning diesel and petrol cars by 2025.
The commercial outlook for both EVs and the batteries that charge them, is looking increasingly positive. Early market scepticism has faded over time, as concerns about battery range and the immaturity of EV technology have been allayed.
However, to succeed in the EV market companies require a proposition that captures the consumer’s imagination and competes at least at an equivalent level to the standard combustion engine powered car. Interestingly, some of the latest electric vehicles are offering higher instant torque, no engine noise and are more reliable, safer and have lower maintenance costs.
The only reason electric vehicles haven’t broken through before now is because the technology wasn’t there, however it is now coming on in a sustained incremental basis. Cost is also a big issue and is one of the key things that prevent people from buying cars. That is changing. The cost of a battery cell in 2010 was US$1000/kwh but is expected to fall to $100/kwh by 2021.
As a result, global electric vehicle penetration has already risen above the common inflection point for adoption of compelling consumer technologies, which is 1 per cent and could rise further to 10 per cent by 2025. In 2017 alone, Chinese automakers produced 680,000 all-electric cars, buses and trucks, more than the rest of the world combined.
This burgeoning market is driving a surge in demand for the commodities battery production depends on –Lithium and Cobalt – creating a range of new investment opportunities across a broad spectrum of companies. A lot of attention from the investment community has focused on the raw materials that go into electric vehicles and the batteries that support them and we pay particularly close attention to Lithium and Cobalt as the EV market accounts for about 45 per cent of their usage. While Cobalt is relatively scarce and the security of its supply is key, lithium is plentiful. In fact, we are seeing an almost unprecedented rise in demand for both these commodities, which is based largely on battery development.
What all this means for the end investor is very interesting. We see the old EM-commodity linkage loosening. Against this backdrop, wider EV disruption involves a diverse supply chain presenting several interesting opportunities to invest in areas such as raw materials, battery components, batteries and potentially even emerging market original equipment manufacturers. We are already invested in a range of EV related stocks and within this landscape we see most value accruing to battery manufacturers and lithium producers. Indeed, one of our key investments is a lithium miner based in Chile, a country which holds roughly 35 per cent of the world’s lithium resource.
Beyond EV and battery related investments, we see strong emerging market potential in the healthcare and consumer retail sectors, as well as developing Asian countries such as India. Furthermore, we currently hold underweight positions in financials and are overweight in the consumer sector.
To capitalise on this investment opportunity, we believe fundamental bottom-up analysis can identify opportunities leading to capital appreciation. Our strategy is very actively positioned, we are not afraid to take high conviction bets and our selection is unconstrained by the index and driven by specific stocks. We aim for quality and look to invest in companies with strong balance sheets and good management teams. We believe that allows us to build a better profile of returns over the long term and remain fully committed to long-term investing.
In recent years emerging market capital markets have broadened and deepened significantly and become more sophisticated and there is a growing range of sectors and companies to invest in. From a geographical perspective, we believe India continues to be a just one very strong prospect where we see a lot of positive investment potential thanks to recent structural reforms.
Naomi Waistell is a portfolio manager at Newton.