Market update report from Investment Director, Steven Lloyd

The hunt for the next Tesla

A piece of news which caught my eye this week was that two relative newcomers to the Electric Vehicle (EV) market are now valued at more than both Ford and General Motors.

I’d be very surprised if any readers had not heard of Ford. But I wouldn’t be if you are less familiar with the names Rivian or Lucid.

Ford was founded in 1903 and has a market capitalisation of $79 billion, give or take. Clearly, a very well-established business and the definition of a household name, Ford sold about 4.2 million vehicles in 2020, generating $10 billion of gross margin.

Rivian, on the other hand, was founded in 2009, delivered a mere 500,000 vehicles last year and made a loss. Despite having only started publicly trading on the US stock market last week (IPO date was 10th November), the market is very excited about Rivian and the stock rallied about 15% on Tuesday 16th alone. The stock is up approximately 72% in a week. That movement puts the market valuation at $148 billion, more than double that of Ford. 

Shares of Lucid, which is viewed by some as the “Ferrari of EVs”, also jumped on Tuesday, this time by just under 24%, giving it a market valuation of $89 billion, eclipsing Ford. Not bad for a company founded in 2007 which delivered precisely zero vehicles last year but did report that reservation orders are filled for deliveries expected this year.

Has the market gone mad?

On the face of it, the valuations seem rather fanciful. How can loss making companies which deliver a handful of vehicles be more valuable than the well-established incumbents?

Governments and manufacturers alike seem to be throwing their weight behind battery EVs, at least in the medium term. Given the gains enjoyed by investors in Tesla, (which is now the world’s most valuable automotive company with a market capitalisation of more than $1 trillion) it is hardly surprising that investors are looking for the next disruptor to the automotive industry. 

Tesla is the poster child of market disruption and is now generating gross margins in excess of Ford. However, the likes of Ford, Volkswagen, Daimler and BMW are all playing catch up and, during my last drive down the M4, I spotted more EVs by the well-established players than I did Teslas.

So, the question is, whether the market has simply got too excited about the newcomers to the market and whether the vast resource and experience of the incumbents will win out in the end. No one knows the answer. Some will point to the fact that new companies don’t have the constraints of reorganising supply chains, retooling construction lines, refocussing of marketing strategies or internal traditions and politics to contend with.

On the other hand, newcomers don’t have the same long-term management experience, through multiple market cycles, including recessions. Nor, arguably, do they have the brand recognition and engendered trust and loyalty that the bigger names have built up over many decades. One caveat is that Rivian is backed by Amazon who has a very strong record of disrupting industries they move into, often for the better in the eyes of investors. Perhaps that explains some of the explosive price movement post IPO.

Will Rivian and Lucid join Tesla in becoming a pseudonym for an EV? Time will tell. For now, the market seems to think so.

Central bank surprises – or not

Moving back to the more mundane areas of the market, the last time I penned an update was the day before the Bank of England’s interest rate announcement. Many commentators were expecting a rise in interest rates and some areas of the market looked to have fully priced this in.

Specifically, the UK government bond (Gilt) market and currency markets were caught a little bit by surprise when the Monetary Policy Committee (MPC) voted to keep rate on hold. The income yield on a 10yr UK Gilts fell from 1.07% to 0.84% in the day following the announcement:

One central bank which did not surprise the market was the US Federal Reserve (Fed). The announced slowing of Quantitative Easing (QE) by the Fed has been, perhaps, the most well telegraphed central bank policy change in history. As a result, markets took the confirmation that bond purchases by the US Treasury would be reduced by $15 billion a month in their stride. This rate of reduction puts the notional end date for QE as June 2022.

New Fed Chair?

One area of uncertainty from the Fed is whether Jerome Powell will be re-nominated for his position as Chair. Powell came under a great deal of friendly fire from the Trump administration and his reputation has dwindled since as a result of news that senior central bank officials were making large trades in the stock market shortly before Federal policy announcements. This amounts to insider trading and large parts of the US government have taken a dim view of the fact that this happened under Powell’s watch.

President Biden is expected to announce his nomination in the coming days. For now, Powell would appear to have enough political capital to make it through to another term as Chair of the Fed. However, a change of leadership, particularly to a more hawkish nominee, may bring a wave of further uncertainty to markets.

Until next time, stay well.