Switching off

The UK registered its one millionth electric car last month. However, a 16% drop in sales by private buyers, has added to fears that sales growth is stalling.

The uptake of electric vehicles (EVs) in the UK continues to be driven by fleet buyers, helped by tax incentives as companies seek to hit environmentally friendly targets. By comparison, private buyers appear more reluctant due to cost and charging anxiety, amongst other issues. EVs have lower running costs than petrol vehicles, but the upfront cost is around 30%–40% higher, according to the Society of Motor Manufacturers and Traders.

Recent data has also found that electric cars can lose as much as 50% of their value after just three years of ownership. With EVs depreciating faster than conventional petrol models, this has added to overall running cost at a time of a cost-of-living squeeze.

Meanwhile, in America, the EV industry has received a number of shocks recently. Tesla, the world’s most highly valued car manufacturer, recently warned that its vehicle volume growth rate may be notably lower than the growth rate achieved in 2023, as it works on the next-generation vehicle at its Gigafactory in Texas, which is due to launch in mid-2025. Meanwhile, Ford has announced it is slowing investment in EVs as US consumers are unwilling to pay a premium. To add to EV sector woes in the US, rental-car firm Hertz recently warned that due to headwinds related to its electric vehicle fleet, notably the insurance burden and repair costs, it is now planning to reduce EV usage.

In Europe, Volvo has announced that it will not provide further funding for Polestar, its EV joint venture with China’s Geely (also Volvo’s owner). Volvo founded Polestar a few years ago, as a standalone EV manufacturer, separate from its own in-house EV operation. Meanwhile, Renault has decided to cancel the flotation of its EV operation, Ampere, due to a lack of appetite from potential investors.

Car manufacturers will be hoping that cooling inflation and lower interest rates make bigger ticket items such as cars and EVs more affordable for consumers. There have also been calls for a cut in VAT to provide an incentive for private buyers.

The prices of EVs have recently been coming down, but European manufacturers will be concerned about the risk of China flooding the market with cheaper EVs. Given the importance of car manufacturing within Europe, particularly employment and the wider integrated chain of smaller suppliers, this could be a major threat unless the EU takes steps to control it.

What have we been watching?

US investors are beginning to re-adjust to the Federal Reserve’s (Fed) pushback on an early interest rate cut. Some are now seeing a ‘greater chance of a later but steeper’ path where the first cut might not come until May. While the Fed’s ‘dot-plot’ guidance still suggests three interest rate cuts in 2024, many are still expecting five cuts in 2024 and a further three in 2025. Investors are also envisaging the increased likelihood of a ‘soft-landing’ for the US economy in 2024 as opposed to a recession, although questions remain about 2025 in the wake of the presidential election. The re-adjustment of US interest rate cut expectations has seen Sterling drop towards $1.25. US equity investors continue to chase AI investments, such as chipmakers Nvidia and Arm with the latter jumping 50% on its latest earnings report. The US S&P 500 index hit an historic milestone climbing above 5,000.

Until there is a peaceful resolution to the Israel/Gaza conflict, attacks on shipping are likely to continue despite the latest US military action. Last week, a British cargo ship was attacked in the Red Sea by the Houthis. This is continuing to affect global supply chains. The latest example is the construction industry, which has seen input costs rise for the first time since September and at the fastest pace since May due to the higher price of some imported building materials.  Meanwhile, Israel’s PM Benjamin Netanyahu has rejected Hamas’s proposed cease-fire terms, saying total victory is possible within months.

America’s shift away from China and the re-onshoring trend by many US manufacturers was reflected in the latest trade data. This showed that US imports from Mexico exceeded those from China for the first time in over twenty-years at $476bn against $427bn while imports from Canada, America’s third-biggest trade partner, were close behind China at $421bn.

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In the UK, house price rises in January were the highest for a year as mortgage rates continued to ease, according to the Halifax. The price of a typical home increased by 2.5%.

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China’s stock market hit a five-year low before bouncing as a state-owned investment company started buying Chinese equities. However, the authorities face an uphill task given the troubled property sector, where the Evergrande liquidation has prompted a rush by developers to offload new properties at significant discounts. The latest data continues to reflect the weakness of the economy, with deflation of 0.8% and producer prices down by 2.8% in January.

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Brent oil edged up to $81 as hopes of a possible ceasefire in Gaza evaporated and fighting spread to the city of Rafah.

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Finally, AI is very much the word these days, but could it come with an environmental cost? US media reports that strong demand from data centres powering AI systems is causing environmental regulators to consider allowing diesel generation to support facilities should power run short. One report suggests that by 2030 power demand from data centres could triple and account for almost 8% of America’s estimated energy demand. 

Read Last Week’s Alpha Bites – A Shrinking pool of talent

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.