Head of Saxo Strats
Ever since commodities rallied post the Covid vaccines and inflation subsequently rose to the highest levels since the 1970s green stocks have been under pressure. This year should have been the rebound year as the market in the beginning of the year was aggressively pricing in multiple rate cuts (seven at its peak). However, with sticky inflation and a robust economy the market has changed its mind pricing only 3-4 rate cuts and this change of narrative has been negative for greens stocks. A galloping fever in crypto, semiconductors and AI, defence, and cyber security has not helped either.
Our three green equity theme baskets green transformation, renewable energy, and energy storage are all down more than 13% year-to-date compared to semiconductors and defence baskets up 16% and 14% in the same period. Tesla shares are down 18% year-to-date. No wonder that Elon Musk is dreaming about AI and robotics as he has come to the conclusion that EVs will become a red ocean. To make things even worse for the green segments in the equity market, the global energy sector (which is dominated by oil and gas companies) has increased 2% year-to-date.
The main driver of this bad performance is high interest rates and lower prices on natural gas. The green transition is one of the most capital intensive sectors of the economy and high interest rates make many green projects less profitable. While the green transition will still get prioritized, the defence agenda, especially in Europe, has taken the lead position in terms of political attention and with strong momentum in defence stocks the market is showing more interest in Rheinmetall (German military manufacturer) than Orsted (offshore wind developer).
One of the key industries in the green transition is the electric vehicles (EV) industry. We are closely monitoring 16 carmakers that are publishing in a transparent way their battery electric vehicles sales (sometimes also called all-electric). These 16 EV makers delivered 2mn BEVs in Q4 2023 up 37% YoY taken the cumulative BEV deliveries among these EV makers to 14.6mn since Q1 2020. The largest BEV maker is now BYD that overtook Tesla for the first time ever and Volkswagen is still maintaining its third position with Li Auto and BMW in a close fight for the fourth spot.
These 14.5mn BEVs have reduced oil demand by 0.4 Mb/d (million barrels per day) which would otherwise have been here today. Compared to a global oil demand of around 100 Mb/d it is still small numbers, but we expect this cumulative oil demand reduction to 1 Mb/d by Q4 2025. By Q4 2026 the EV industry will hit an additional annual oil reduction of 0.5 Mb/d. With Wright’s Law at place and also economics of scale production costs will continue to fall for EVs and in a few years from now it will not make sense for consumers in developed countries to buy a gasoline car over BEV unless there are specific needs to consider. Wright’s Law alone estimates that by Q4 2026 the production costs of a new BEV will have fallen by 36%. However, with the lithium-ion battery being a big part of the overall costs and lithium carbonate prices still being volatile the estimated cost reduction including the battery costs come with a high uncertainty.
As with the green transition stocks in energy, the EV industry has experienced a demand slowdown from higher interest rates and the intense competition from Chinese EV makers that have finally made it in the car industry due to less complexity of assembling an EV over a traditional combustion engine car. Fisker, an EV upstart, has recently said that it could run out of money and is pursuing a partnership with Nissan. NIO, a Chinese EV maker, has also warned that it will need more capital to push ahead. The car industry, whether its run on gasoline or batteries, is still the same old capital intensive and low margin business it has always been.
NIO is expected to deliver Q4 earnings tomorrow before the US market open. Analysts expect revenue of CNY 16.8bn up 5% YoY and adjusted EPS of -2.70 improving from -3.61 a year ago. NIO delivered 50,045 BEVs in Q4 2023 falling behind other Chinese EV makers such as XPeng and Li Auto at 60,158 and 131,805 delivered in Q4 2023 respectively.
NIO kept its price steady in Q4 while many others including Tesla and BYD lowered its prices which was likely contributing to the 10% QoQ reduction in deliveres in Q4. Gross margin is expected to improve as battery costs are coming down and the 10% reduction in its workforce should lead to better operating metrics although the EV maker is still losing money. Analysts covering the stock is also nervous about the lack of new EV models and as such the outlook and the company’s view on its capital position will be scrutinized.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.