A Driving Force

22 January 2020

By Ronan Kearney, Investment Manager HC Verbatim Multi-Index Funds

In a previous article, I considered factor investing in the US and UK markets. The article outlined and defined several factors such as Value, Size, Low volatility, Quality and finally Momentum. Momentum is the hardest to invest in successfully, because once you can identify it, it’s usually pretty obvious to everyone else too. But what about when one particular stock in a sector appears to have a momentum that defies the general economics of the sector? 

Global sales of passenger cars have increased dramatically in the recent past. Sales averaged 39.2 million per annum* in the last decade of the previous century (1990-1999), and then averaged 54.9 million for the first fifteen years of this century (2000-2015).  However, there was a massive spike in 2016 as global sales of passenger cars jumped to 77.3 million in 2016, and then increased again to 79 million in 2017. Since then there has been a small decline to 78.6m in 2018 and now 77m in 2019*. This is a good example of an industry that enjoyed significant momentum over the last 20 years but is now potentially seeing the end of that period.

As you would expect, car manufacturers enjoyed positive share price movements during this time. For example, Toyota was valued at around $100bn 15 years ago and is now around the $200bn mark. Volkswagen, which is the largest seller of automobiles in the world, selling almost 11m of the 77m total global sales in 2019, under its many brands, saw its share price grow from €58 10 years ago to €179 today.

And yet…all of these gains were made quite early on. In fact, both Toyota and VW have been valued more highly than this during the last 5 years. The Global push for decarbonisation and the advent of new technologies has put many manufacturers on the back foot – except one.

The extraordinary rise in the value of Tesla has been well documented, despite having global sales that are a fraction of other major brands, as is illustrated by the graph below. Earlier this month it became the most valuable US automotive manufacturer in history.

This valuation is extraordinary in the context of a declining sector facing many significant challenges. Or it would be, if Tesla was actually a car company

Although Tesla manufacturers cars, they are actually a showcase for its fantastic energy technology and software. And the share price is not really a reflection of the fact that it ‘may’ reach 1 million units of production this year. The thing that many people realise now is that as a result of its incredible Gigafactory in China, Tesla now leads the world on battery innovation, battery production, battery economies of scale, vertical integration (which seems to only be increasing), and battery supplier priority — because suppliers know that they will have strong long-term demand with Tesla.

In addition, investors are betting that fully autonomous electric self-driving cars are imminent. Tesla has promised a fully self-directed car by the end of 2020, travelling with human oversight only. If it delivers on this promise, then the future of personal travel is about to enter an incredible era, and Tesla leads from the front. But the point of self-driving technology is not really to run on roads, it is to open up the sky.

A significant block to the development of personal flying transport, is that regulators would be resolute in prohibiting self-flying vehicles and would put such incredible demands on training and monitoring that only a handful of people would ever bother putting in the effort, and they probably already all fly small aircraft or helicopters. However, AI guided autonomous personal aircraft would transform personal transport, and if powered by clean electrical technology, would rapidly consign the polluting earth-bound automobile to history.

Essentially, the only reason for using the roads would be for transporting large groups of people or heavy loads. Most transportation would be large autonomous electric or hybrid trucks transporting goods, with some coaches and other group transportation vehicles. Point to point systems such as trains will effectively be obsolete. Already Tesla has promised that its new model Roadster (retailing at $200,000), will be capable of being adapted for short flights.

In conclusion, 2030 may see the end of carbon-based fuel systems for personal transportation, and transformation of Cities into electric only zones. New petrol or diesel cars will be prohibitively expensive to run and buy, so that flying cars look reasonable to lease or hire on a per journey basis. Of all the current automotive manufacturers, only Tesla is positioned to compete.


*All statistics are from statista.com for Global stats, acea.be for European stats, and smmt.co.uk for UK stats.


The value of investments and any income from them can go down as well as up and is not guaranteed. Your clients could get back less than they originally invested. Past performance is not a guide to future performance. The portfolios' investments are subject to normal fluctuations and other risks inherent when investing in securities. Verbatim Asset Management has taken due care and attention in preparing this document, which is solely for the use of professional advisers. Verbatim cannot be held responsible for any inaccuracies arising out of information detailed within and will not accept liability for any loss arising out of or in connection with its use. This article is for information only and should not be deemed as advice.