How investors can ride the EV boom without betting on Elon Musk
Should investors wait before betting on EVs? Or is it time to plunge into assets that could benefit from the EV revolution?
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No company embodies the growth potential of electric vehicles more than Tesla Inc. But with the value of Elon Musk‘s company falling from more than US$1 trillion last year to US$383 billion, many investors are rethinking how to get exposure to the EV boom.
The size of the global EV market is projected to grow to US$1.3 trillion in 2028 from US$287 billion in 2021, predicts data company Sustainalytics. It’s an opportunity few investors will want to miss.
Even beyond Tesla’s current turmoil, the nascent market faces a bumpy road, with concerns about range anxiety, shortages of raw materials such as lithium, cobalt and nickel, and a geopolitical push to establish western supply lines independent of China.
So, should investors wait before betting on EVs? Or is it time to plunge into assets that could benefit from the EV revolution? And are there smarter ways to do this than buying Tesla?
Should you buy the Tesla dip?
Some investors have been nursing their wounds from the beatings that volatile growth stocks such as Tesla have taken. Globally, Tesla figured prominently in funds with a focus on batteries which fell 29 per cent in 2022, according to Morningstar Inc., compared with an 18.4 per cent drop in global equities.
The plunge means this could be the right time to buy into battery technologies, Kenneth Lamont, senior fund analyst at Morningstar, said. “Markets tend to overestimate the short-term impact of new technologies and underestimate the long-term impact.”
Others argue that Tesla always came with too much baggage linked to Musk personally (including his Twitter acquisition) to make it the best way to ride the EV wave.
Deirdre Cooper, head of sustainable equity at Ninety One Ltd., said that her firm has always avoided Tesla because of issues connected to labour, corporate governance and the fast pace of its autonomous driving rollout. “We’re not looking to buy the dip for those reasons.”
Does Tesla cast a shadow over the whole EV and battery industry?
Not necessarily. While other EV-linked stocks have fallen from their peaks, they have been more resilient than Tesla.
For example, two top rivals, both Chinese, have seen their stock fall by far less than Tesla’s 64 per cent plunge: Hong Kong-listed BYD Co. Ltd. is down by only 15 per cent in the past year and Contemporary Amperex Technology Co. (CATL), the world’s biggest battery manufacturer, by 26 per cent.
Cooper said the global EV market is dominated by China, which accounts for 60 per cent of plug-in electric-car sales. And, she added, Chinese carmakers are supplied by Chinese battery, component and materials companies — independently of Tesla.
The shift to electric cars is transforming the automotive industry, with powerful carmakers giving ground in terms of purchasing power to suppliers, both battery makers and mining groups.
Indeed, lithium mining companies have been resilient to general equity weakness due to a 10-fold increase in the past two years of battery-grade lithium chemical prices to US$75,000 a tonne, according to S&P Global Commodity Insight. Industry leader Albemarle Corp. advanced six per cent, while close competitor Sociedad Quimica y Minera de Chile (SQM) jumped 48 per cent in the past 12 months.
Reg Spencer, an analyst at Canaccord Genuity, said the growth rate of EVs makes miners of lithium, cobalt and nickel the most attractive link in the supply chain.
Which corporates look attractive?
With established car producers managing a legacy portfolio of petrol and diesel vehicles, more direct exposure to EVs can be found through suppliers.
Cooper’s preferred stocks include Wuxi Lead Intelligent Equipment Co. Ltd., a leader in battery-making equipment, Zhejiang Sanhua Intelligent Controls Co. Ltd., which makes battery heat management systems, and Analog Devices Inc., a manufacturer of semiconductors for EVs.
But Spencer said materials shortages mean that mining companies hold the pricing power.
“If the power now lies with the producers of the materials critical to manufacturing the batteries that go into the electric vehicles, then the best way to play it is through the upstream,” he said.
He expects big wins in smaller-scale lithium producers that could be acquired by bigger groups via “dramatic consolidation.”
Nick Stansbury, head of climate solutions at Legal & General Investment Management (Holdings) Ltd., said a key lies in identifying which resources will see demand sustained beyond the 2020s.
For example, the development of sodium-ion batteries, a different technology touted by CATL, could reduce demand for battery metals such as lithium.
What about ETFs?
Many retail investors opt for funds to diversify risks, especially as miners can face extreme shocks, not least pollution disasters.
The best-performing battery metal exchange-traded fund available to United Kingdom investors this week was the L&G Battery Value-Chain ETF, a mix of miners and battery manufacturers that had annualized returns in the three years to the end of 2022 of 21.4 per cent, compared with 3.8 per cent for global equities.
Another approach is to go for funds linked to metals prices. Element Funds, a natural resources-focused asset manager, at the end of 2022l launched a US$5 million ETF tied to futures contracts for copper, lithium, nickel and cobalt.
A small fund may not be right for investors concerned about liquidity. But the choice could grow if the EV market expands as vehicle makers expect.
“We’re in a rough patch right now with the global economic situation,” Kevin Murphy, principal metals and mining analyst at S&P Global Commodity Insights, said. “But the energy transition is not going away, and electrification of vehicles is going to ramp up.”
© 2023 The Financial Times Ltd.
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