How can you profit from the electric car bonanza?

published 31 August 2017

170831-electric-car-b — The electric car takeover is now just a matter of time

The rush to fill the roads with electric vehicles seems to be picking up pace by the day.

This week, Aston Martin declared that all of its cars will be available with hybrid technology (where you combine an electric battery and a petrol engine in some combination or other) by the mid-2020s.

Meanwhile, governments are lining up to ban or discourage the internal combustion engine.

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It's all very exciting. But how can you profit from it?

The electric vehicle revolution is here

I'm a sceptical sort, but I have to say, I am now quite convinced that the electric vehicle takeover is now just a matter of time. You can go on about whether or not they are efficient, or really all that clean, or fun to drive, or all the other perceived problems with them. You might be right. I have no dog in this fight.

However, it feels as though those arguing against electric vehicles are now on the wrong side of history. Again, this is not a moral or technological judgement. But I'm increasingly seeing complaints that feel as if they're driven by ideology, or a basic dislike of change, or an ornery love of internal combustion engines, rather than objective analysis.

Don't get me wrong there are plenty of ideologues on the other side too, whose judgement is clouded by evangelical zeal. The difference is that they've been joined by the more hard-nosed crowd who are basically just interested in being on the right side of a trend rather than having any particular bone to pick.

Clearly electric cars are feasible there are already plenty of them on the roads, even if they represent a small proportion of current vehicle ownership. Plenty of companies are now working on making better batteries and even if electric cars weren't a big story, they'd be making these batteries anyway.

Anyone who can come up with a better battery in these days of smartphones, laptops, tablets, solar panels, wind turbines, a craving to go off-grid well, they're on to a winner.

And car manufacturers must be waking up to the idea that as well as being a threat, electric cars could be a fantastic opportunity. Just think a whole new upgrade cycle.

So any concerns I have on electric car-related investments has got nothing to do with electric cars materialising or not. It's entirely to do with whether or not they're valued sensibly or not.

Tesla is the obvious example. Tesla's biggest selling point is a visionary CEO who is very good at dangling shiny new things in front of the market to distract it from the fact that he's shovelling an astounding amount of their cash into projects that may or may not ever pay off.

Can Tesla really stay out in front, given the competition now coming thick and fast from established, decades-old rivals? Stranger things have happened, but at current prices, you're not being compensated for the surely high chance that it will fail.

The return of the lithium bubble

What about the other options for investing in the boom? The big comeback trade has been the key ingredient for batteries lithium.

The investment case for commodities tends to be pretty simple. It's a cyclical business. There's either too much of the stuff, or too little. Right now, there's too little lithium compared to the amount people reckon is going to be needed for all these electric car batteries (this applies to other obscure metals too, such as cobalt).

It generally takes a long time to produce additional supply of metals. You have to find the deposits (that's fairly easy when it comes to lithium). Mining and refining (the key process in producing batter-ready lithium) takes time.

So naturally, you get a bottleneck as people panic and rush to secure the limited supplies that are already available. That drives prices higher. In time, the new supply will come online, demand won't be as high as everyone had forecast, and prices will come back down. But it's a pretty long cycle.

As a result of all this, the price of lithium has surged in recent years, and so have the prices of stocks related to producing it. It's the perfect recipe for over-exuberance.

Lithium has one of those beautifully simple narratives that you only get in the commodity market. It's the "new oil". Countries that play host to lots of the stuff will be "the new Saudi Arabia". You can write a lot of headlines and generate a lot of buzz with stories like that.

We've already been through this at least once already with lithium. You can see it in the chart below, of the Global X Lithium ETF. This launched in 2010, roughly around the time of the last lithium mania and has been making a rapid comeback in the last few months. (Note that you'd still be quite out of pocket if you bought it during the earlier lithium boom.)

This is one of those stories where we all know the ending a bust comes along and even the strongest, best lithium producers will be terrible investments. But in the meantime, it can be profitable to ride the boom.

Lithium has already come a long way, of course. However, it does look as though this might still have legs. The London Metal Exchange is now looking at introducing a contract for lithium, making it easier to trade. That's a sign of growing enthusiasm, but it doesn't feel like a top. When the inevitable physical-backed lithium ETF launches maybe that'll be more like it.

We looked at a variety of ways to profit from the rise of the electric car in the most recent issue of MoneyWeek including a couple of lesser-known lithium miners for those who think this bull market still has a way to run. Check out the piece online here if you haven't already read your copy.

(And if you're not already a subscriber, sign up here roughly the price of a single share trade!)

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.