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#Market Strategy — 18.01.2018

(R)evolution In Mobility: The Impact Of Electricity

Guillaume DUCHESNE & Xavier TIMMERMANS

2018 Investment Themes series: Megatrends theme #2

In a bid to curb global warming, fight pollution and solve transport problems in congested cities, political authorities in the West and in China are taking measures which will accelerate the growth of electric vehicles (EVs). This (r)evolution is opening up opportunities at every level of the value chain: materials (metals, chemical products used in batteries), electricity producers, EV makers, and carpooling services.

Growing transport woes (particularly in cities) call for a rethink of mobility. In the context of reducing greenhouse gas emissions, fighting pollution (micro particles), compounded with the growing difficulty of travelling to, from and around cities, political authorities and economic players are forced to invent new ways of getting around. Thanks to technological advance, electricity offers new opportunities in this area.

Changes in consumer behaviour…

The automobile industry is undergoing a massive transformation, and in the coming decades it will see an acceleration in electric vehicles. Demands for a cleaner ecological environment in many countries coupled with the recent scandals in the industry will explode the number of cars made with a (part) electric engine. Although electric vehicles still have a small market share (less than 5%), an increasing number of users are planning to go electric when they purchase their next vehicle. The penetration of vehicles could exceed 11% of the world market in 2025 and 26% in 2030 (source: Exane, December 2016). In this context, electric cars are becoming a huge issue for automakers, particularly with the rising number of newcomers gradually emerging on this segment.

Even though the electrification of vehicles has its disadvantages (problem of autonomy and higher costs, albeit on a sliding scale thanks to innovation), it now meets the specific needs of consumers’ mobility (e.g. short journeys across the city). Other means of transportation (electric bikes, other individual means of transport) are also riding the wave of this sales momentum thanks to electrification (although it may seem anecdotal, the use of hover-boards and scooters is very much on the rise!). These new means of transport are meeting consumers’ needs to get around beyond car travel.

… but also in collective initiatives.

Better mobility is part of the “smart cities” concept which consists of investing in quality urban services. The effects of overpopulation in cities are fairly powerful, as economic players (companies and consumers alike) find an interest in concentrating in the same region. However, built-up cities bring inconveniences. Sprawling towns and congested city centres make getting around a real problem. To meet this challenge, large metropolis and governments are investing in cleaner and less noisy public transport (tramways, tube trains, high-speed trains). With or without support from public authorities, companies in the private sector are innovating too with new transport solutions (self-service electric cars, scooters, bikes and car sharing services, etc.).

How to invest in mobility electrification?

We recommend playing the mobility theme via individual stocks and investments funds.  Indeed electrification covers a host of different business activities, so we recommend investment solutions along the whole value chain.  Numerous players are involved in mobility electrification:

At the beginning of the value chain, massive demand for high-performance batteries will lead to a large surge in demand for lithium, graphite, nickel and cobalt. Moreover, as cobalt has become very dear and stock levels face political risks, battery manufacturers are turning to solutions that consume much larger quantities of nickel.  Demand could reach 40% by 2025. Meanwhile, demand for copper should also rise but the impact will only be felt in 2025 when electric vehicles and recharging stations start to ramp up their market share.

Secondly, electricity providers and suppliers of components for electric vehicles (batteries, semi-conductors, etc.) and infrastructure companies will be sensitive to the growth in electrification.

Finally, at the end of the value chain, electric carmakers, but also end services offered to consumers (e.g. carpooling) might benefit from new trends in mobility. Mobility is a worldwide issue. Developed countries and emerging markets are confronted with pollution and congestion problems in towns and cities. Therefore mobility is becoming a top priority for town and country planners in most countries.

In conclusion, the mobility theme will benefit from a long-term market trend, in our view. Investors will benefit from opportunities in a very large number of activities, both in cyclical sectors (automobile, semi-conductors, etc.) and defensive sectors (utilities), but also services and manufacturing.

MAIN RISKS

This theme is not immune from environmental scandals in view of the need to extract raw materials to make batteries.

It also depends on government initiatives (e.g. tax breaks).

A sharp fall in the oil price could modify the preference for electric transportation.

Although mobility benefits from long-term trends, we continue to favour cyclical sectors. Less appetite for risk might alter the bullish trend of the theme.

 


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