Excitement around (Electric Vehicles) EVs over the last few months looks like classic bubble trouble!
We’ve already had:
- allegations of fraud at Nikola Corp [NASDAQ: NKLA]
- hubristic / crazy / cult-leader like CEO Elon Musk at Tesla [NASDAQ: TSLA]
- dubious business model listing – SPAC crazy
- hair-raising valuations that seem almost impossible to live up to!
Recent price action almost suggested that the EV hype bubble may be about to burst. Since January when Tesla peaked it has fallen by 36%. That’s $306bn of market cap wiped out.
What will happen to sub-sectors, which were pulled higher by the EV craze? Companies like Samsung SDI / LG Chems / Panasonic have all re-racked considerably higher. Copper / lithium / cobalt raw material prices have surged and so of course metal producer stocks have too! Semiconductor stocks are almost as rare as their new graphic cards! (Just in-case you didn’t know most new graphics cards are selling out within hours of release!) The story has been stretched so far to include thoughts about the increased demand for electricity and who will it affect / benefit and we have seen this positive tailwind lead to electric turbine markets like GE and Hitachi price a fair bit higher! So if this really is the burst of the EV car trade – is it maybe worth easing up on these second order plays?
Next up is the question of EV fever and energy stock performance. If everyone expects everyone to be driving everything that’s all-electric, why do we need oil? And therefore why own any of the oil names? BUT as we start to question the whole EV trade / bubble we start to question our future projections for oil demand and suddenly it makes sense to own oil names and they stop underperforming. It feels like that is what we have been seeing play out these last few weeks with the rocket move in oil price!.
How will the EV bubble popping affect the rest of the market? The forces pushing retail have been considerably stronger in the market this year and just recently we have seen record levels of margin debt being used! This is surprising since we usually see margin debt against the ‘hot, high growth’ names rather than the boring staple deep value names. Therefore as and when this EV bubble pops, one thing we are to see is margin calls that affect a lot of retail traders. This is because through platforms like Robinhood and Saxo it has become increasingly easy for amateur investors to buy more stock than they have cash, which is described as a purchase “on margin”. When a stock that retail traders own in their margin accounts crashes in price, it forces them to have to sell some of their holdings. As a result of this we see the names that are retail favourites really underperform, which in the current market environment are all the hot and exciting EV and tech names.
Going to be an interesting watch!
