The electric-car bubble could get an awful lot bigger from here

The switch to electric cars is driving a huge investment bubble. But that’s not necessarily a bad thing, says John Stepek. Fortunes will be made and lost – but bubbles get things done.

VW ID4 electric car © Jens Schlueter/Getty Images
VW says its ID4 will be first “affordable" electric SUV on sale in the US
(Image credit: © Jens Schlueter/Getty Images)

Bubbles are a part of investment life. You get big bubbles, like the dotcom boom. You get little bubbles, like the ones that erupt in sectors like cannabis or 3D printing every so often.

Ideally, as investors, we’d like to ride a bubble up, then step off, and watch it collapse back down, safely sitting on a huge pile of cash.

It’s a lot harder in practice than in theory. But in case you want to give it a shot, I think we’ve got the makings of a real humdinger of a bubble forming right now.

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Bubbles can be good for us

Bubbles often come with very negative connotations. Bubbles raise your hopes on the way up, then smash them to pieces on the way down. Bubbles burst. If you’re the one holding the bag when they do, you’ll lose money, often a lot of it.

Bubbles are also extraordinary breeding grounds for fraud. Our low-interest-rate world has already created some vintage frauds in the last few years (Germany’s Wirecard is only the most recent). And I am absolutely positive beyond all doubt that we’re going to see some real stunners in the next few years.

But you know what else bubbles do? They get things done. Nothing gets an otherwise wildly ambitious or even borderline deranged plan of action over the starting line like the promise of getting rich beyond your wildest dreams.

Bubbles are how the railways got built. Bubbles laid the fibre-optic cables that enable the internet. If you really want to get a lot of people to spend money on laying out the infrastructure for a new era, then a good old-fashioned investment bubble is a very good way to do it.

And I reckon that’s what we might be seeing in the electric and alternative fuel vehicle market right now.

That probably sounds daft (and it might be). I mean, Tesla is already a one-stock bubble machine on its own – I’ve lost track of how many times you could have doubled or halved your money by buying it at various points throughout this year. And we’ve seen would-be electric-truck maker Nikola go through its own little boom and bust cycle already too.

And yet, when you look at what’s happening in the real world as opposed to financial markets, it feels as though we’re just at the beginning of this transport revolution, rather than near the end.

I’m not saying you should invest in Tesla, by the way. I genuinely still don’t know what to think about the company. But whatever you think of Elon Musk and all the hype he pumps out, the one thing that you can categorically say without doubt is that Tesla has produced an electric car that people want to drive.

That has proved a game changer for the sector. And it’s now about a lot more than just Tesla. Even as Musk was delivering another hit-and-miss PR moment yesterday in the form of “Battery Day” (which appears to have been a bit of a damp squib), Volkswagen was unveiling the ID4, which will be its first “affordable" electric SUV to be sold in the US, says tech site The Verge.

Politics and technology are aligning

Meanwhile, the political pressure to cut carbon emissions is only growing. Governments around the world are competing to see who can ban petrol and diesel cars first. There’s talk of the UK ban being pulled back from 2035 to 2030 now. You can see this as cynical “virtue signalling” – and you’d probably be right. But there’s more to it than that.

Car manufacturing is big business. It’s an industry that’s always been viewed as important by governments in every nation. So if we’re looking at a relaunch of the entire automotive sector, plus an all-new car replacement cycle, then every government wants to look like an attractive place to set up that business.

The desire to find some sort of economic and morale-boosting way out of the lockdown-induced hole will only be adding to this sense of mission.

Your personal view on this is irrelevant. The question of whether the electric car manufacturing process creates more lifetime emissions than a fossil fuel car is also irrelevant. The point is, it’ll happen because it’s the conventional and accepted wisdom that this is the way forward.

In turn, that means the bigger players in the sector are adapting to it and accepting reality and finding new ways forward (this is also the biggest risk for the likes of Tesla). The 2015 “Dieselgate” scandal was already pushing them in that direction. If big car manufacturers have the assurance that electric or hydrogen is now the future, whether they like it or not, then they’ll retool.

You then have to think of all the spin-off activity that goes into changing how we drive. Electric cars need different infrastructure – charging points rather than petrol pumps. They most probably require changes to our electric grid infrastructure, at both the grand scale and the micro scale. And this is before getting into the competition from hydrogen fuel cells.

There’s also the more distant future (but not that distant). Self-driving is the next big battleground and the area where companies will battle for a competitive edge. That’ll require all sorts of technology and sensors and the rest of it.

Of course electric cars are not new – even if you only count back as far as their first Tesla incarnation. But the move to mass adoption will be the thing that really gets this going. I suspect that a proper full-blown front-page mania is still to come.

How can you take advantage? I looked at a few options in last Friday's issue of MoneyWeek. But if I’m even close to being correct about its bubble potential, we’ll be writing a lot more about this topic in the months ahead. So subscribe here if you haven’t already – you get your first six issues free.

John Stepek

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.