A professional investor tells us where he'd put his money. This week: Mark Whitehead, portfolio manager, Securities Trust of Scotland, picks three favourites.
Major technological advances and a push towards "greener" transportation are changing the way we drive forever. So while there has been some short-term weakness in the automotive sector (owing to cooling demand in China and speculation over the end of the economic cycle), the future of motoring mass electrification and autonomous driving is an exciting long-term structural growth theme.
Driverless cars are nearly here
We are now close to the tipping point between fossil fuels and alternative power sources: sales of electric vehicles (EV) and hybrid cars are forecast to rise sharply over the next ten years. What's more, we are moving ever closer to autonomous driving becoming a reality, with cars at the lower end of the automation spectrum already moving into the mainstream. The first driverless vehicles could arrive as early as the start of the next decade.
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This is partly due to an arms race between some of the best-known car brands. The higher levels of automation are hugely disruptive to the current carmakers as they fundamentally challenge the concept of what makes a car and how they will be owned in future.
What is the best approach for investors in this theme? There is no clear winner in the vehicles sector, but one area to avoid is perhaps the original-equipment manufacturers (OEMs), traditional car producers. They could see margins suffer in the short term and their ability to fend off competition seriously eroded in the medium term.
As the technological requirements for the next generation of vehicles become more complex, exposure to these developments should lead to structural growth.
A boost for car-part suppliers
Suppliers to the vehicle industry, for example, could benefit from the increased technological demands from autonomous and EVs. Continental (Frankfurt: CON), one of the largest auto-supply companies, estimates that there will be a sharp rise in the value of content-per-car-opportunities (technological aspects such as engine management or thermal-management systems) in hybrid vehicles and battery EVs.
Meanwhile, as we move to a future of networks of autonomous vehicles, there is a greater need for connected road infrastructure, such as signs, signals and ramps, which should be beneficial for companies such as toll-road operator Transurban (Sydney: TCL). The Australian-listed firm is already running a series of trials on motorways in Melbourne, Sydney and in the Greater Washington area in the US.
Transport, and in particular the EV revolution, is an important facet of achieving global sustainability, so it is no surprise to see the companies with long-term care for the environment at the heart of their business models seeking to drive the future of the industry.
A good example is Royal DSM (Amsterdam: DSM), which has developed lightweight, durable materials capable of replacing metal in various components of the vehicles of the future, improving their fuel economy and lowering emissions. This work is part of its efforts to meet one of the 17 UN Sustainable Development Goals (SDGs): responsible consumption and production.
Mark Whitehead is the Head of Sustainable Global Equities at Sanlam. Mark launched and co-manages the Sanlam Sustainable Global Dividend Fund. In 2007, Mark launched one of the first global equity income funds and has experience in managing both open-ended and closed-end products, as well as charity and institutional portfolios, with an increasing focus on sustainability.
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