Chief Investment Strategist
Summary: Tesla lost its leading position in the EV market to BYD in Q4 2023 and the overall EV market is expected to grow significantly in 2024. Lithium carbonate prices have also fallen significantly, which will allow EV makers to lower prices and accelerate adoption. The US government has pushed ASML to block Chinese deliveries of its advanced chip-making machines impacting the company's revenue in China. However, long-term underlying growth drivers in datacenters, EVs, and general digitalization of the economy will still support growth over the next decade.
What has been the obvious trajectory for over a year became a reality in Q4 2023 with Tesla losing its leading position in the fast expanding EV market. BYD delivered 526,409 battery electric vehicles (BEVs) compared to Tesla at 484,507 which exceeded estimates by a small margin. Given the strong ending to 2023 from Tesla and BYD, the 15 largest EV makers that we are tracking will likely have delivered more than 2mn BEVs in Q4 20233 for the first time in Q4 2023. This means that in 2024 those 15 EV makers will likely deliver more than 10mn BEVs which would equate to roughly 10% of all new passenger vehicles globally.
If this becomes reality 12 months from now then those 15 EV makers will have cumulatively delivered around 25mn BEVs since Q1 2020 which roughly is 0.65Mb/d reduction in oil demand that would otherwise have in the oil market.
The highest penetrated EV market is the world is Norway with around 22% of the outstanding passenger cars being EVs. This has so far led to an oil demand reduction of 5%. In 10 years from now and if batteries become cheaper and more powerful so they can be used for trucking then oil demand will begin to be drastically reduced.
In the meantime, we could have a situation where demand for gasoline drops way faster than diesel which in the future could force oil refineries to increase the price of diesel to make up for the losses in gasoline thereby increasing the cost of heavy transportation.
With a new year in front of us, it also worth looking at the key input factor for BEVs which is lithium carbonate used in the lithium-ion batteries. After a significant rally in lithium carbonate prices in 2021 and 2022, peaking out at prices up 1,400% higher than the lowest prices in 2020, lithium carbonate prices are down 83% from their peak. This will allow EV makers to lower prices without eating too much into gross margins and accelerate the adoption of BEVs.
ASML, a Dutch semiconductor equipment maker of lithography machines used for advanced chip manufacturing, has started the year down 4.4% over the first two trading sessions on news that the US government has pushed ASML to block Chinese deliveries before the January deadline for the export ban. ASML has said that the blocking has only impacted a few Chinese customers and revenue to mainland China is around 14% of total revenue. Chinese import data suggest that Chinese companies were busy taking delivery of ASML’s machines in the second half of 2023 before the new stricter export rules would go into effect.
How should investors think about ASML and the risks related to revenue in China given the ongoing technology fight between the US and China? For long-term investors it is really about their long-term expectations for growth. ASML is returning roughly 2.9% in dividends and buybacks which is a bit below the MSCI World Index at 3.2%. The long-term expected real rate return is 2.2% which means that global equities have a long-term expected real rate return of 5.5% annualised at current valuation. As ASML is returning less capital to shareholders than MSCI World any performance above global equities must come from higher real rate growth. Given the underlying drivers of growth for semiconductors in datacenters, EVs and general digitalization of the economy it is not unreasonable to think ASML will continue to deliver significantly higher growth rates than the overall economy over the next decade.
Maersk, one of the world’s largest shipping companies, has seen its shares rally 11.2% in the first two trading days of 2024 as the escalating situation in the Red Sea has rerouted almost all container ships from Asia to Europe south of Africa instead of through the Suez canal. The extra time spent on the seas and longer travel routes means higher freight rates and higher profit margins for shipping companies such as Maersk.
While in the short-term the events in the Red Sea is positive for Maersk and other shipping companies the longer term dynamics in the global shipping industry are negative. There are overcapacity and freight rates are back to normal levels. “Slowbalization” as IMF has recently coined the current period in terms of global trade volume will continue in the years ahead meaning that Maersk will experience low normal freight rates with low volume growth. Sell-side analysts remain sceptical of Maersk shares with a consensus price target 15% below the current price.
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.
