Investors shunning energy and auto manufacturers on the back of the rise in popularity of electric vehicles are overestimating the technology, according to Invesco Perpetual’s Stephen Anness. 
The FE Alpha Manager, who last week told FE Trustnet that he is buying into unloved energy stocks, said investors have been too quick to judge the potential of the electric vehicle (EV) industry.
“I am not trying to deny the likelihood of electric vehicles coming in the future – the technology is improving quite dramatically and there is a reasonable level of demand – but I think to my mind the stock market has [as ever] taken a theme and extrapolated it very quickly and in quite a sizeable way into the future,” the manager of the Invesco Perpetual Global Opportunities fund said.
“With regards to EV adoption whilst I think it is likely to happen and will inevitably grow, there are huge challenges to rapid adoption of electric vehicles over the coming few years,” Anness (pictured) added.
There are broadly one billion cars in the market, almost all fitted with petrol or diesel engines despite the rise recently in electric vehicle technology, he said.
“Even if in four or five years’ time 30 per cent of new cars were electric you would still see a net increase in combustion engine cars because that would still offset the amount being scrapped,” he noted.
“There are about 45-50 million new cars being added to the global fleet every year so you would have to have a huge adoption rate to get to the point where the car park of petrol diesel cars even holds flat let alone begins to fall significantly.”
And while the manager does not deny that this may happen in time, there are challenges for the sector to overcome before it becomes mainstream.
First is the cost of buying an electric vehicle, which Anness said is still far more than that of a petrol or diesel car.
While they may not be prohibitively expensive, he said other issues such as charging and battery life mean that consumers are not getting a superior product for the added cost.
“I think there are challenges around infrastructure as there are a limited number of charging points and the rapidity in which these cars can be charged is pretty slow at the moment without a supercharger which you can have in commercial locations but most houses in the UK could not cope with an 11-kilowatt charger,” the manager said.
Additionally, around 45 per cent of houses in the UK do not have off-street parking, meaning that charging a vehicle from home could be extremely difficult.
“There are just challenges along the way and I am sure that over time we will have more infrastructure, more charging points and we will find ways to charge the batteries faster but at the moment the energy density within a battery and the ability to charge it quickly and efficiently doesn’t lend itself to being a superior product to a petrol or diesel vehicle.
“The consumer needs the product to be better to make the shift to electric vehicle and potentially in the future that may be true but currently the challenges make it unlikely we will see adoption at the rate that is being though by some people.”
Yet the market is pricing in a strong adoption rate and therefore creating mispricing of those companies that appear to be most disrupted by the innovative technology.
Last year for example, the S&P 500 Automobile Manufacturers sub index underperformed the broader S&P 500 by 14.19 percentage points as investors feared disruption.
Performance of indices in 2016
Source: FE Analytics
He said: “There are a number of good car manufacturers out there and in the future, even if it is electric vehicles, I am sure they will play a part in it because they have some very good brands and scale, etc.”
As such, the manager does not own electric vehicle manufacturer Tesla but does include Volkswagen among the top 10 holdings of the Invesco Perpetual Global Opportunities fund.
“We don’t own Tesla which is the most obvious electric vehicle manufacturer because frankly if you look at the market valuation of Tesla compared to Volkswagen it is actually quite incredible,” he said.
“Tesla is worth much more in the market’s eyes than Volkswagen despite VW having a much stronger balance sheet, generating huge amounts of net income, owning some fabulous brands such as Porsche and Audi etc.
“There are things like the diesel issue obviously which has soured sentiment towards the company, rightly so, and they need to deal with that. But ultimately the stock market has rewarded Tesla very highly on the hope for electric vehicles in the future and it is punishing many of the traditional auto-manufacturers.”
The other area that the market has mispriced on the back of electric vehicle assumptions is energy, with too much emphasis being placed on what it could mean for the oil price.
“We get a lot of pushback on the likelihood of electric vehicles substantially impacting the demand for oil and gasoline products and the impact that is likely to have on oil demand and therefore the long-term oil price,” Anness said.
The fund has a 14.2 per position in the energy sector and the manager said that oil prices are unlikely to be affected by the sea change in developed world private transportation.
Performance of index over 10yrs
Source: FE Analytics
“The first point is that passenger cars represent only about 19 per cent of global oil demand, so it is not the majority of it,” the manager noted.
Indeed, a lot of demand comes from other transportation such as aeroplanes and ships as well as industrial production.
However, and perhaps most importantly, he said, a lot of energy demand is being driven by emerging markets.
“So, we are likely to and expect to see a reduction in oil demand in many developed countries but demand will be picked up in other parts of the world as those countries continue to mature and increase their energy consumption on a per capita basis,” he added.