When a sector is strong in the face of widespread economic weakness, active investors take notice. Despite a global pandemic that caused car sales to drop 16%, a report by the International Energy Agency (IEA) noted that electric vehicle (EV) registrations actually increased by 41%.
By the end of 2020, there were an estimated 11 million EVs on the road globally, including 10 million passenger cars.
The EV sector stands to be a key beneficiary of government policies that encourage the production and purchase of electric vehicles. In the United States, the infrastructure package proposed by the White House, while still under negotiation, includes significant funds earmarked for EVs.
Among specific policy goals, the administration seeks to fund 500,000 charging stations as well as offer a rebate to consumers who buy EVs. Other countries are enacting similar measures. Germany, for instance, decided last year to extend EV subsidies to 2025 and doubled the financial incentives available to consumers.
Projected growth of the EV market
Sources differ on the speed of EV adoption over the coming decade. On the conservative end, BloombergNEF’s Electric Vehicle Outlook projects 116 million electric vehicles will be on the road by 2030. A more bullish forecast is offered by the IEA. Given current government policies, they believe there could be 145 million EVs in use 10 years from now, comprising 7% of all road transportation. And the IEA suggests that more aggressive climate programs could result in up to 230 million EVs on the road by 2030.
Companies set to benefit from EV adoption
The most obvious industry that should benefit from increasing adoption of EVs is automotive. But auto manufacturers are far from being the only companies that may grow as the world buys more and more electric vehicles. Looking down the supply chain, other companies such as those that produce the specialized batteries necessary for EVs, those that make charging stations, and those in the semiconductor sector are poised for growth.
Why durability matters from an investment standpoint
Professional, active management can play a key role in identifying opportunities from the expected growth of the EV market. Investors can benefit from the careful research and expertise of a team of analysts and portfolio managers who are closely following the evolution of the electric vehicle supply chain, public policy, and consumer trends.
One benefit of investing in this wider EV ecosystem is the potential for gains that are durable. Durability matters because of the challenge of forecasting growth far into the future. Investors are more likely to misprice long-term growth than short-term growth. To assess durability, it can help to have a disciplined research process with a focus on this question, and to benefit from experience with it over time.
It may be, for example, that the companies that provide the products necessary for electric vehicles have more predictable growth and staying power than some of the EV manufacturers themselves. If nothing else, fishing in a bigger pond means more opportunities for diversification. The leading EV firm, Tesla, trades at quite high valuations, making it potentially more volatile. Complementing a position in Tesla with other EV firms may be a smart strategy for the EV growth trend.
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