Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Weekly Update: Saxo Thematic Investing Performance
Peter Garnry
Chief Investment Strategist
Summary: The green transformation theme basket was the worst performing theme basket last year as investors are increasingly getting worried about elevated electricity prices in Europe and China causing negative impact on the demand for electric vehicles. As a result EV stocks were down across the board last with Tesla shares down 11%. As Tesla is eating through its backlog and demand is coming down the EV maker may be forced to lower prices next year risking a cut to its operating margin and profits.
High electricity prices are hurting the green transformation
Last week was a rough week for equities as the Fed and ECB did not deliver any softness to their rate policies causing a jolt to the positive inflation narrative that had been fueling the equity market since the rally on 10 November when the US October inflation report showed signs of inflation easing. Especially European equities had a rough week driven by high electricity prices as wind speeds were very low and a market not prepared for an ECB ready to hike rates into a recessionary dynamic. Elevated electricity prices in Europe are beginning to negatively impact demand for EVs as proclaimed by the CEO of a VW components division and higher electricity prices in China is also hurting the adoption rate. Europe and China are the two largest EV markets in the world. The EV demand worries were reflected in our green transformation basket declining the most last week down 5.8% taking this year’s total return to -50.7%, the third weakest performance this year among our theme baskets. High electricity prices mean slow green transformation.
EV stocks are under pressure as Tesla decline 11%
If we look across the green transformation basket we see a clear pattern of EV stocks leading the declines with Tesla being the most prolific EV stock down 11%. Tesla has seen its order backlog decline rapidly in the US due to shifting supply and demand factors. Tesla has built out a lot of production capacity that has culminated as demand has come down in Europe and China due to high electricity prices, and in the case of China the lockdowns also played a role in demand destruction. In the US demand has been pushed into 2023 due to the US Inflation Reduction Act that is not enabling the US federal tax credit of $7,500 until next year. Tesla might be forced to reduce prices next year to keep demand up utilizing all of its production capacity and that could cause margins to decline in 2023 negatively impacting profitability. This is not reflected among analyst estimates but institutional investors have seen the canary in the coal mine reducing exposure to Tesla while investors are still estimated net buyers. Tesla shares closed just above $150 on Friday and is entering a consolidation area in the price back from late 2020.
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