Electric Vehicles: a long-term investment
Author: Jonathan Lo
November 14, 2017
If you’ve been invested in the electric vehicles (EV) theme, 2017 has been a strong year. As more countries have adopted measures to embrace electric vehicles, stocks with exposure to the theme have had strong rallies. Tesla, despite its recent troubles, is still up 43% year-to-date, and lithium producers like Albemarle (up 63%) and SQM (up 105%) have also seen share prices rise rapidly. However, this momentum has run into a speed bump of sorts.
Earlier this month, the House Republicans made a number of pro-growth proposals in unveiling their highly anticipated plans for tax reform. However, one of the offsets was a plan to eliminate the $7,500 tax credit for electric vehicles currently in place. As a result, we saw some weakness in companies with exposure to electric vehicles immediately following the news.
While the development, if ultimately adopted, would be a setback for the electric vehicle theme, there is no certainty at this point whether this will actually become a part of the legislation – rather, as part of the “give and take” of the legislative process, much is expected to change between now and the finality of any tax bill. That said, for some time we have tempered our short-term enthusiasm in the sector. In Martin Grosskopf’s recent AGF Perspectives post, he wrote that “some near-term cautiousness is warranted given very dramatic changes within the electric vehicle supply chain”, but that also “the longer term trend is your friend”.
Indeed, longer term, however, our view is that the trend remains intact. Globally, momentum continues to move towards electric vehicles, as CO2 targets are being set that will be difficult to meet without greater adoption of EV’s. Countries like the U.K., France and China are setting target dates to ban sales of fossil fuel vehicles. And in the U.S., state-level incentives such as those in California, which is the biggest U.S. market, will remain in place (in fact, to date, they have ratcheted up in all areas where Trump has cut back).
We expect that during the debate period, companies with adequate current emissions controls exposure and transition technologies will do well. Within the EV space, we would see any sustained setback as a buying opportunity for what is a multi-decade theme. Electric vehicles are quickly becoming the norm, with or without tax credits.
Expected market share of EV purchases through 2050 (LHS), Global EV penetration by region (RHS)
Source: IHS, BofA Merrill Lynch Global Research estimates