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Battery advances help fuel electric vehicle revolution

Revolutionary progress in the electric vehicle (EV) market is driving a surge in demand for advanced car batteries and related commodities with major implications for both emerging markets and global investors, according to Newton portfolio manager Naomi Waistell.

Improving technology and policy support from a range of developing and emerging market governments are providing a major fillip for both electric vehicle and car battery manufacturers and investors in these sectors.

The Netherlands and Norway are just two countries which have committed to banning diesel and petrol cars by 2025 as part of a wider drive to eliminate air pollution and widen the use of EVs. Concerns on climate change and fuel economy are also providing key drivers of change against a backdrop of widespread policy action and media support.

Speaking at the recent BNY Mellon Investment Conference Agents of change in London, Waistell, a portfolio manager for the BNY Mellon Global Emerging Markets Strategy, said the commercial outlook for EVs and the batteries that charge them is also looking increasingly positive. Early market scepticism about the range of the battery or distance electric vehicles can travel and concerns about the immaturity of EV technology have faded over time, she added.

“EV economics continue to improve, powered by better and cheaper batteries. To succeed in the EV market you need a proposition that captures the consumer’s imagination and competes at least at an equivalent level to the standard combustion engine powered car. In fact, some of the latest electric vehicles can offer higher instant torque, no engine noise and are more reliable, safer and have lower maintenance costs,” she said.

Waistell added that global electric vehicle penetration has already risen above the common inflection point for adoption of compelling consumer technologies, which is 1% and she believes it could rise further to 10% by 2025 and said Chinese automakers produced 680,000 all-electric cars, buses and trucks in 2017 alone, more than the rest of the world combined.1

“The only reason electric vehicles haven’t broken through before now is because the technology wasn’t there but now it is 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,” she added.

Global EV/Plug-in hybrid EV sales penetration

Source: CEIC, hybridcars.com, EAFO, Mathew Klippenstein, Macquarie Research, January 2018. For illustrative purposes only.

According to Waistell this burgeoning market is driving a surge in demand for the commodities battery production depends on – including 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% of their usage. While Cobalt is relatively scarce and the security of its supply is key, lithium is very plentiful. In fact, we are seeing an almost unprecedented rise in demand for both these commodities based largely on battery development.

“What all this means for the end investors is very interesting. We see the old EM-commodity linkage loosening. Against this backdrop, wider EV disruption involves a diverse supply chain presenting a number of 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% of the world’s lithium resource.”

Source: MSCI, Credit Suisse Research, 04 August 2017. For illustrative purposes only.

Beyond EV and battery related investments, Waistell continues to see strong emerging market potential in the healthcare and consumer retail sectors and developing Asian countries such as India. Describing the positioning of the BNY Mellon Global Emerging Markets strategy, Waistell said it currently holds underweight positions in financials and is overweight in the consumer sector.

Commenting on Newton’s EM investment style, Waistell added: “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. In terms of stock selection, 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 we 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,” she concluded.

KEY POINTS

* EV economics continue to improve, powered by better and cheaper batteries.

*The burgeoning EV market is driving a surge in demand for related commodities such as Lithium and Cobalt.

* Newton believes the historic EM-commodity linkage is now loosening.

TAKE AWAY

EV disruption involves a diverse supply chain presenting a number of interesting opportunity areas to invest in.

 

The value of investments can fall. Investors may not get back the amount invested.

  1. 1 Source: China Association of Automobile Manufacturers, Forbes. March 2018.

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