Head of Equity Strategy
Summary: Equities are pushing higher with Tesla leading the gains in the US among mega caps due to much better than expected Q4 deliveries hitting 308,600. European equities are also hitting new all-time highs as better news flow on Omicron is causing a repricing due to a quicker normalisation and higher growth. In today's equity update we also take a look at Maersk and freight rates, and how logistics and supply constraints will continue to make it difficult to predict inflation.
Will Tesla become the world’s largest carmaker?
Tesla stunned the market yesterday announcing 308,600 deliveries in Q4 taking total deliveries in 2021 to 935,600 with a trajectory to hit 1.5-1.6mn deliveries this year. The delivery figures were way ahead of estimates and investors rewarded the carmaker by sending its shares up 14%, an inch from its all-time high.
Our chart on battery electric vehicles (BEV) show that Tesla is accelerating relative to the competition from already a leading market position which should make the industry nervous. Volkswagen is playing catch up, but there is a risk that the company’s Q4 figures will be distorted like Q4 2020 due to EU rules on emission related costs creating an incentive to overproduce and delivery before year-end (last year Volkswagen did that and many BEVs to their own subsidiaries). We will not know the full picture of the Volkswagen vs Tesla battle before Q1 ends.
The reason why we do not have figures for many of the big brands is that many of them are still not providing the necessary information on BEV sales. Ford has big plans but little to show yet, with some estimates putting BEV deliveries at 150,000 in 2022 which in that case would be a tenth of Tesla.
In our recent research note on the global car industry, we said that things are not adding up any longer with the combined market value of the largest carmakers having increased multiple times over the past five years despite falling new car registrations suggesting the market has saturated and consumers are postponing their purchase to get an EV. The only way the combined market value makes sense is if the combined industry will become more profitable in the future producing EVs instead of gasoline and diesel cars. That could be the case but the jury is still out on this. If we assume the market is mostly efficient then it is pricing that Tesla will become the biggest carmaker in the world when the industry has transitioned to being fully electric. For now the growth trajectory is supporting this view, but if it turns out to be right are many of the traditional carmakers grossly overvalued. These are complex questions and evolve predicting technology and the industry over the next 10 years which is a task with a great error attached to it.
Tesla is estimated to deliver revenue of $73.7bn in 2022 with EBITDA of $16.2bn as analysts expect operating margins to expand further to become the industry’s best by far. With a valuation of $1.2trn the market is implying the carmaker will be industry leading and will significantly increase profitability from current levels. We will let investors decide for themselves on this matter, but do not underestimate disruptive change as we have seen several industries in the past decade undergoing significant change by new entrants.
Maersk signals inflationary pressures will be difficult to forecast
Maersk shares were up 3% yesterday as investors are betting container freight rates to remain elevated for the foreseeable future. The leading freight indices ended at all-time highs last year driven by excess demand for goods in the developed world and a shortages of truck drivers and container ships, in addition to China’s zero-case policy on Covid-19 adding to constraints around ports. The pandemic will continue to have a negative impact and especially China’s stance on how to mitigate Covid-19 will have important implications for inflation. The reason why inflation forecasting has been rather simple in the past three decades is that inflation has mostly been driven from the demand side, but the pandemic has caused the supply side dynamics to play a bigger role. Underinvestment in our logistics and mining activities are causing short-term price pressures and longer term the green transformation and urbanization will continue to put upward pressure, and the biggest unknown is to what extent companies will reconfigure their global supply chains with potential higher production costs as a consequence.
European optimism over Omicron pushes STOXX 600 to new all-time high
Europe is currently facing a massive increase in Covid-19 cases with Omicron being the dominant variant. Luckily the new variant is found to be less severe with hospitalization risk half that of the Delta variant and the clear divergence between new cases and hospitalizations seen across Europe means that there is light at the end of the tunnel. Mobility, travel and leisure activities will normalize much faster and as a result European equities are getting repriced higher. If the commodity boom continues and we see interest rates go higher this year, it should benefit European equity indices as they are more procyclical and have a higher weight on financials. The biggest risk to the positive sentiment is the ongoing energy crisis in Europe which in the short-term has improved somewhat due to milder weather and LNG shipments from the US, but things can quickly change in Europe.
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