All change in the car industry but how should investors react?

31st August 2017 by Darius McDermott

The car industry is undergoing profound change right now.

The rise of electric vehicles, fuel-efficient cars and automation represent three trends to watch closely over the coming years. The combination of all three suggest the automotive industry has reached an inflection point.

The growing popularity of electric cars is underpinned by Volvo’s recent announcement that it will only produce electric and hybrid cars from 2019 onwards. Meanwhile, General Motors plans to launch 10 electric models by 2020 and Toyota hopes to mass-produce them by 2020.

At a government level, there is continued support for electric vehicles. The UK and French governments recently announced bans on the sales of pure combustion engine cars by 2040. Meanwhile, central and local government in China continue to provide a range of incentives and subsidies to encourage the use of electric vehicles.

So what does this mean for the automotive industry? And how can investors profit from disruption in the auto space?

One of the biggest positives associated with the growth of the electric car market is that it has the potential to reduce pollution and carbon emissions. When you factor in the broader shift towards automation, safety for both drivers and passengers could also be improved significantly. This is due to the use of sensors and ‘lane departure warnings’, which alert drivers when a car is veering out of its lane.

The Guinness Global Energy team estimates that sales of pure battery electric vehicles and plug-in hybrids will grow from 0.9% of total vehicle sales in 2016 to 5.3% in 2020. Fast forward another 10 years, Guinness expects this figure will jump to 50% of sales[1]. If their forecasts are to be believed, this could have ramifications for oil demand.

It is worth remembering that growth in the electric vehicle market will not necessarily signal the death of the petrol car. This is because car makers will continue to adapt and innovate, making internal combustion engines more efficient.

In my opinion, the electric car market faces two major challenges right now. The first is the cost of batteries and the second is the infrastructure that is in place to support the day-to-day use of electric vehicles.

The good news is that battery prices are coming down – and I would expect this trend to continue over the coming years, driven by technological developments. The UK government’s plans to spend £246 million to encourage research and innovation in battery technology over the next four years is more than welcome. In response to the second challenge, I would expect to see continued investment in charging points across the UK.

So where do the investment opportunities lie? Many fund managers are hoping to take advantage of change in the automotive sector by backing companies across the value chain: from car makers through to battery and component suppliers.

They include Baillie Gifford Global Discovery, managed by Douglas Brodie, which has held Tesla Motors since early 2013. 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.

Fellow Baillie Gifford fund managers James Anderson and Tom Slater also expect to see continued growth in the electric vehicle market. Tesla represents their second largest position in the FTSE 100-listed Scottish Mortgage Investment Trust, which targets disruptive businesses with strong growth prospects.

Technological change in the auto sector is also a key theme in the RWC Global Emerging Markets fund. Fund manager John Malloy is hoping to benefit from the growth of electric vehicles in China through Brilliance China Automotive Holdings, which appears in the fund’s top 10 positions. The China-based car maker partnered with BMW to launch the BMW Brilliance Zinoro all-electric crossover back in 2013.

So is it time to jump into the fast lane for electric cars? The car industry is unlikely to stand still over the coming years and this is creating select opportunities across companies that provide the technology and components for driverless and electric vehicles.

However, the valuations of a number of stocks with exposure to this space look quite high, so I would urge investors to fasten their seatbelts and accelerate with caution.

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’s views are his own and do not constitute financial advice.

[1]              Source: Guinness Asset Management, Global Energy Report, August 2017