Why we have exposure to the long-term EV theme
In this week’s video insight, Scott Phillips our Head of Distribution joined Gary Rollo, Portfolio Manager for the Montgomery Small Companies Fund to discuss the long-term electric vehicle (EV) theme, what’s been happening in global markets and the team’s approach to investing in EV.
Scott Phillips: Welcome to this Montgomery video insight. My name’s Scott Phillips, Head of Distribution here at Montgomery and with me today is Gary Rollo, the portfolio manager for the Montgomery Small Companies Fund. Electric Vehicles are a theme that a lot of investors are interested in, but for a long-term theme, there’s been a huge amount of volatility. Can you explain to me what’s going on?
Sure, that’s a big question. The quick answer is at the back end of last year, the supply of lithium couldn’t keep up with demand, and that demand was pulling forward out of China because they had some significant subsidies that were due to expire. So, there was a race on to buy the car or manufacture it for sure. What that did is peak demand was just sitting on top of the existing supply base. The supply base couldn’t react fast enough, and you had prices shooting up.
That process has come to an end as the subsidies have expired, and we’re now left with other forces balancing demand and supply. On the one hand, you still have a long-term thematic driving the market, but there are some question marks about the extent of growth of demand in some of the more mature markets because of economic considerations. For instance, Europe’s a major market for EVs, but we all know that there’s been a change to the economic climate there. So, that’s a factor that’s been driving people’s expectations of demand and with it, the lithium price in the short run.
Scott Phillips: How have you in the Montgomery Small Companies Fund been investing in this theme?
Well, back last year, we could see the conditions that were driving demand, that pull forward of demand for instance. So, we had an overweight on this sector at that point in time, including our developer. So, a company that wasn’t yet in production but would have been so very quickly. As we saw those conditions shift and change, we removed the developer from the portfolio and, I guess, reduced the exposure to some of the other names we have. We have some stocks in the portfolio that are producing product just now, and so they’re able to monetize in the market. High prices last year, good prices just now, and we think they’ll continue to do so. They’re able to turn those prices into significant quantum’s of cash, and that’s how we’ve been focused on monetizing the very strong pricing regime for lithium that’s been out there in the market.
Scott Phillips: Some EV stocks are generating monster cash piles, what have those businesses been doing with them?
That’s a great question. Because this industry is still forming, the major players in the lithium space have got lots of opportunity to reinvest those cash flows to grow their production. For example, you’ve got Allkem (ASX:AKE). It’s a lithium producer today of brines in Argentina. It’s got projects in Canada and expanding its production in Argentina at the same time. So, they’re taking their cash flows from their existing production and they are growing their capacity today. You’re seeing that those companies that are producing cash flows today, they are using those cash flows to expand. So, you collect the growth in the industry from the existing producers today.
Thank you Gary. That’s part one of a two-part series looking at the EV theme. Join us for the next episode, where we will talk about some of the stocks that we’re currently invested in and also what’s happening in the M&A side of this interesting long-term theme. Thanks, Gary.