The European Parliament is due to decide in early June whether to ban internal combustion engines (ICE) in light-duty vehicles from 2035, following recommendations from the Parliament’s environment committee earlier this month. The proposed measures are part of the European Commission’s package of climate and energy laws aimed at cutting greenhouse gas emissions by 55% by 2030 as the bloc embarks on a path to zero net by 2050. Although a 2035 deadline for combustion engines will be a strong signal that the future of motoring is all-electric, according to CIO, the end of the combustion engine in cars has begun well earlier. The diesel engine in passenger cars has been in decline, at least since the Volkswagen diesel scandal in 2015, as evidenced by the sales figures for electric vehicles, which have, at least in some markets, already exceeded those for diesel-powered cars. And gasoline engines should soon follow the same pattern.

But while the switch to electric vehicles will be a difficult task for automakers – involving significant costs, potential erosion of market share and a technological leap in uncertainty – CIO sees it instead as a long-term chance for the company. automotive industry, although with some companies better positioned than others. So here’s what investors need to know:

Near-term headwinds for the auto industry persist as demand continues to outpace production. The car manufacturers’ order books are currently full. At the same time, the sector is affected by supply chain stress – due to the war in Ukraine, Chinese COVID-19 restrictions and ongoing semiconductor issues – which are still holding production back. Automakers have learned to live with this, but auto component suppliers are the hardest hit. Meanwhile, relative P/E and P/B valuations are already near the bottom of their historical ranges, so we believe some negative outlook is already priced in.

But as stocks get cheaper, cars get more expensive. The results of the sector in the first quarter seem rather promising. For CIO, we are not at the end of the automatic cycle. An increase in margins for electrified vehicles, due to the ability to pass on higher (raw material) costs, should provide further assurance that the automotive industry is moving in the right direction.

“Green mobility” has acquired real momentum, offering long-term growth prospects. Consumer demand for electrified vehicles is increasing exponentially, reflecting rapidly changing consumer preferences due to higher technological affinity, regulatory pressures and incentives, and the desire for a net-zero carbon economy . Automakers have devoted significant capital, research expenditure and product launches to electrification, with the importance of combustion engines gradually diminishing. CIO expects a sharp drop in sales of vehicles that emit CO2 and other pollutants. This is already apparent in China and Europe, where electrified vehicles have overtaken diesel sales, and over time in the United States as well.

We therefore believe that despite a number of headwinds for the automotive sector, many negative aspects have already been taken into account, and the trend to become less dependent on fossil fuels will gain momentum, which should benefit the IOC’s “Smart Mobility” theme. We remain confident that by 2025, the share of electrified vehicles (all-electric, plug-in and full hybrids) will account for 25-30% of global light vehicle sales, the overall theme addressable market (which also includes autonomous driving and carpooling) around 465 billion USD. By 2030, these amounts are expected to increase to 60-70% and around USD 2,000,000 respectively. Learn more here. And for more on how to find longer-term value in stocks, click here.

Main contributor: Editorial UBS