How to invest in the rise of the electric car

24 November 2017

The Chancellor pledged millions of pounds of funding for electric vehicles in the Budget. We examine whether the move towards electric cars could create opportunities for investors.

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.

What you’ll learn:

  • How the electric car market is set to grow.
  • How investors may potentially be able to benefit from the rise in electric vehicles.
  • Why investments in new technologies can be particularly volatile.

The government showed its commitment to electric cars in the Autumn Budget, pledging millions of pounds towards their development.

Philip Hammond, the Chancellor of the Exchequer, announced that £200m, matched by private investment, would be invested into a new £400m Charging Infrastructure Fund to help with the installation of charging points for electric cars. The government also plans to provide a further £100m to guarantee the continuation of the Plug-In Car Grant until 2020. The grant helps consumers with the cost of buying a new battery electric vehicle.

The Chancellor also announced that with effect from April next year, there won’t be any benefit-in-kind charge on electricity which employers provide to charge employees’ electric vehicles. The government will also make sure all new homes are built with electric car charging points.

There are already plans to ban the sale of new diesel and petrol cars in the UK by 2040, signalling a new chapter in motoring history.

In just a few decades, the internal combustion engine could all but disappear from Britain’s roads, replaced by battery-powered electric vehicles.1

The aim is that using battery-only cars will limit the level of nitrogen oxides in the atmosphere, which is considered to pose a major risk to public health, and follows a similar commitment made in France under President Emmanuel Macron’s government.

UK government ministers have previously unveiled a £255m fund to help councils tackle emissions from diesel vehicles, as part of a £3bn package of spending on air quality.2

The changes will see an even greater focus on battery technology in the next few years, as car manufacturers seek to develop electric vehicles with longer ranges.

Here, we examine the growth of the electric car market, and how investors may be able to benefit from the development of new motoring technologies.

Remember with all investments there is a risk that their value could fall and you could get back less than you put in.

The rise of the electric car

The number of electric cars on the road around the world increased to around 2m in 2016, according to the International Energy Agency.3 The government’s pledge to invest £35m in the ultra-low emission vehicle sector is expected to see thousands more electric vehicle charge points installed on streets and at workplaces.4 The government has committed to almost all cars and vans being zero-emission by 2050.5

As a result, demand for electric cars is expected to accelerate dramatically over the next few decades. OPEC has revised its forecast to 266m electric cars in 2040, almost six-fold the previous estimate of 46m.6

There are a growing number of models already available. Electric vehicle producer Tesla, has entered the mass market with the launch of the new Model 3 sedan.7 The car has a range of 220 miles and will feature a single touch screen dashboard display. It has already had over half a million advance reservations.

Volvo has announced plans to only make fully electric or hybrid cars from 2019 onwards, in a move that’s cited as marking the beginning of the end for the internal combustion engine’s dominance of motor transport.8

Several other major carmakers, including Renault-Nissan, BMW, and VW have declared plans to expand their production of electric cars.

Given the gradual improvements in battery technology, electric cars may become more affordable within a few years. Battery packs make up a huge component of electric vehicles’ retail price.

Bloomberg forecasts that electric vehicles will become price competitive on an unsubsidised basis from 2025.9

However, there are concerns over how extra demands for electricity can be met, and whether there will be enough charging points available.

Ways to gain exposure

Investors keen to take advantage of potential opportunities arising from increased production of electric cars must remember that investing in new technology carries particular risks. It is impossible to predict with absolute certainty which of any new developments will be successful and deliver returns for investors.

Technology is usually a highly cyclical sector that is sensitive to the ups and downs of the business cycle, which may lead to volatility in stock prices. Unpredictable changes in regulation may also pose a risk to companies. If you are unsure where to invest, seek professional financial advice.

Investors can invest directly by buying shares in the companies which manufacture electric vehicles, but remember there are particular risks involved in investing in single companies. Individual share performance relies on the particular company concerned. You would ideally need to undertake analysis of the company, their balance sheets and management, and even then there would be no guarantees that you would profit from your research.

One way to help spread risk and diversify your holdings is to choose collective investments, such as unit trusts and open ended investment companies (OEICs), or investment trusts. These pool your money with that of other investors, with a professional fund manager choosing and managing a wide range of investments on your behalf.

Learn more about investing in funds

Investors can gain some exposure to Tesla through, for example, funds such as the Baillie Gifford Global Discovery fund, with the company ranking as the sixth biggest holding in the fund. General Motors, which produces several all-electric models, is among the holdings in the Artemis Global Growth fund. Alternatively, an indirect way to gain exposure to the growth in electric cars is to consider natural resources funds, which could potentially benefit from growing demand for metals used in electric car battery production.

For example, some of these funds may hold companies involved in lithium exploration, with lithium a key element in electric car batteries, or copper, which is also used in batteries as well as rotors. According to the international Copper Association, the rising number of electric cars is set to raise copper demand from 185,000 tonnes in 2017 to 1.74m tonnes in 2027.10

Among the best-known funds in the natural resources sector are the First State Global Resources fund and JPM Natural Resources fund, which invest in some of the world’s leading mining companies.

Bear in mind, however, that if you are investing in such a fund, returns will be more closely linked to the performance of the underlying companies it invests in than the price of natural resources, although these will have some bearing on share value.

Another option is Exchange-Traded Funds (ETFs) which track the price of a particular resource, such as copper. These are passive investments which can be traded in ‘real time’ just like shares, and their value will fall and rise in line with the commodity or market they are tracking.

As is the case with all investments the value of commodities can go down as well as up, so you could lose money. This asset class can be highly volatile and so is not for the faint-hearted.

Remember, too, that our referring to these funds does not constitute advice or a personal recommendation to invest in these or any other investment.

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The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.

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