The European Parliament is set to decide whether to ban internal combustion engines (ICE) in light vehicles from 2035 in early June, following the recommendations of the Parliament’s environment committee earlier this month. The proposed measures are part of the European Commission’s package of climate and energy laws aiming to reduce greenhouse emissions by 55% by 2030 as the bloc sets out on a path for net zero by 2050. Although a 2035 cut-off date for combustion engines would be a strong signal that the automobile future is all-electric, in CIO’s view, the end of the combustion engine in cars began much earlier. The diesel engine in passenger cars is in terminal decline, at least since the 2015 Volkswagen diesel scandal, as is evident from EV sales numbers, which have, at least in some markets, already overtaken those of diesel engine cars. And petrol engines are likely to follow the same pattern soon.
But while making the switch to EVs will be a tall order for carmakers—resulting in significant costs, a potential erosion of market share, and a technological leap into uncertainty—CIO sees this rather as a long-term chance for the auto industry, albeit with some companies better positioned than others. So this is what investors should be aware of:
Short-term headwinds for the auto industry persist as demand continues to outstrip production. Order books for automakers are currently full. At the same time, the sector is being affected by supply chain stress—due to the war in Ukraine, China’s COVID-19 restrictions, and ongoing semiconductor issues—which is still holding production back. Automakers have learned to live with this, but auto component suppliers are affected the most. Meanwhile, relative P/E and P/B valuations are already close to the bottom of their historical ranges, so we believe that some negative outlook is already priced in.
But while stocks are getting cheaper, cars are becoming more expensive. The sector’s 1Q results look quite promising. In CIO’s view, we are not at the end of the auto cycle. An increase in margins for electrified vehicles, due to the ability to pass on higher (raw material) costs, should offer additional comfort that the auto industry is moving in the right direction.
“Green mobility” has acquired real momentum, offering long-term growth prospects. Consumer demand for electrified vehicles is growing exponentially reflecting rapidly changing consumer preferences due to higher tech affinity, regulatory pressures and incentives, and the desire for a net-zero carbon economy. Automakers have put significant capital, research spending, and product launch focus into electrification, with combustion engines gradually decreasing in importance. CIO expects a sharp fall in the sales of vehicles that emit CO2 and other pollutants. This is already apparent in China and Europe, where electrified vehicles have surpassed diesel sales, and over time in the US as well.
So we think that despite a number of headwinds for the auto sector, a lot of negatives have already been priced in, and the push toward becoming less dependent on fossil fuels will gather momentum, which should benefit CIO’s “Smart mobility” theme. We remain confident that by 2025 the share of electrified vehicles (full-electric, plugin, and full hybrids) will be at 25–30% of global light vehicle sales, with the addressable market of the overall theme (which also comprises autonomous driving and car sharing) around USD 465bn. By 2030, those amounts should increase to 60–70% and roughly USD 2tr, respectively. Read more on this here. And for more on how to find longer-term value in stocks, click here.
Main contributor: UBS Editorial
