Investing in the switch to electric vehicles

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.
  

Now that the UK ban on new diesel and petrol engines is less than ten years away, companies are heavily investing in the switch to electric.

Ditching combustion engines to go electric for new vehicles in 2030 should make a big dent in global emissions, as road vehicles are responsible for around 20%¹ of the global emissions total.

Battery-only cars are part of the long-term transition to zero emissions transport. It will also limit the level of nitrogen oxides in the atmosphere, which is considered to pose a major risk to public health. Traditional carmakers are preparing to go all-electric with all the big names announcing their intentions on when they can stop producing petrol and diesel powered engines and go green.

But car manufacturers are not the only businesses that form part of the big switch. There are plenty of technology companies that currently play a crucial behind-the-scenes role in the automotive supply chain.

These businesses provide computer chips – known as semiconductors – and essential raw materials to make the batteries to power the cars.

It’s expected to be a hugely valuable industry. By 2026, the size of the global electric vehicle market is expected to increase over four-fold to reach an estimated global market size of some $725 billion².

Stephen Peters, Portfolio Manager at Barclays, said: “The big switch to electric for vehicles is an important long-term theme since the transition to zero emissions transport of the world is crucial – and it’s happening. Moving away from combustion engines is just one aspect of many changes needed but an important one all the same.

“The key for car manufacturers is supplying electric vehicles with longer ranges, which means a greater focus on battery technology.

“To make the batteries you need microchips as well as commodities. There are a number of important UK-based mining companies involved in the extraction of materials such as lithium, and particularly copper, which goes into making a car.

“There are many exciting businesses involved in developing the vehicles, and the new technologies for next generation electric and autonomous (self-driving) cars that are catching the eye of fund managers interested in this theme.”

The move to electric vehicles will be an area of interest for investors who feel passionately about helping the environment since the switch will reduce dependency on fossil fuels.

Peters highlights, however, that investors can still run into ESG issues.

He added: “There can be issues with the supply chain, such as the extraction of raw materials to manufacture batteries (such as lithium, nickel and cobalt) and concerns over energy use. There is also potential employment and human rights issues affecting the mining sector in certain developing countries.

“It’s also worth noting that there’s an ethical compromise in backing carmakers now, as they will still be making money from the sale of petrol and diesel engines.”

ESG issues aside, there are fund managers interested in carmakers such as Tesla, the world’s most valuable car maker, which has led the way as the only all-electric manufacturer.

There is also much interest surrounding German car giant Volkswagen, which is said to be hot on the heels of Tesla, setting a target that 70% of the cars it sells in Europe will be fully electric models by 2030.

However, there are managers looking at those “behind-the-scenes” companies such as Rio Tinto which produces lithium for electric vehicle batteries and has recently started production of battery-grade lithium from waste rock.

UK mining giant Glencore has recently struck a deal with market-leader in EVs Tesla, to guarantee its supply of cobalt. It also operates its own battery factories inside and outside China.

Another firm of interest is Johnson Matthey, a global leader in sustainable technologies, which uses responsibly sourced nickel, cobalt and lithium raw materials and has pledged a long-term sustainable supply of critical raw materials for Europe.

Since technology plays such a huge part in this theme, managers see opportunities in companies such as American-Irish Aptiv, which supplies semiconductors for advancing active safety features, autonomous driving and vehicle electrification.

Further afield, Korean manufacturer Samsung SDI makes batteries for electric vehicles.

Investors who believe in the growth story of the switch from combustion engines to electric can access these mentioned above and more through funds managed by professionals, rather than choosing individual stocks themselves.

We have a number of funds on the Barclays Funds List which currently own companies that relate to the theme of electric vehicles, among other holdings.

• BlackRock BGF Sustainable Energy Fund owns Samsung SDI
• JO Hambro UK Equity Income holds Rio Tinto
• Jupiter Ecology holds Johnson Matthey and Aptiv
• Jupiter UK Alpha holds Glencore
• Polar Capital Global Technology owns Volkswagen
  

Please remember that the fund manager may choose to disinvest in stocks at any time so if you want exposure to the electric vehicle market on a more permanent basis, you may want to consider other investments such as Exchange Traded Funds.

Investing in companies that are part of the electric vehicle switch is just one of many investment ideas and should be part of a widely diversified portfolio.