Go Far, Go EV

Market Trends and Global Economic Shifts

At the time of writing, the S&P 500 Index is reaching a new all-time high, showing a year-to-date increase of 6.3% after experiencing a drop of nearly 18% in early April. The 10-year US Treasury yield has climbed to around 4.3%, reflecting a slight rise from levels just below 4% earlier in the year.

In the currency markets, there has been a clear directionality, with the Dollar Index declining by almost 10% since January. This represents the worst start to a year for the US dollar since the 1980s, marking a significant shift from the previous dominance of the greenback.

European Market Transformation

In Europe, just 12 months ago, equity markets were priced for a prolonged period of low growth, low inflation, and low interest rates, similar to Japan’s experience over the past few decades. The region was facing a lack of investment flows, with existing allocations primarily focused on bond-like substitutes such as quality names with attractive shareholder yields.

However, the fiscal situation in Europe has undergone a fundamental transformation. The improved growth outlook is supported by lower interest rates, as the European Central Bank has reduced its policy rate by a total of 1% this year through four 25-basis-point cuts.

European equities have recently attracted fresh investment capital, although these inflows have been heavily concentrated in the defense and banking sectors, leading to a shift in market leadership beneath the surface.

Asian Market Developments

Across the Pacific Ocean, Chinese export volumes have shown surprising resilience despite the US tariff measures. Increased shipments to other destinations have offset the expected decline in US exports.

One notable development in the Asian markets is the debut of the world’s largest IPO this year: Contemporary Amperex Technology (CATL) listed on the Hong Kong stock exchange in late May. Nearly 90% of the IPO proceeds will be used to fund a project in Hungary, reinforcing CATL’s position as the world’s largest battery manufacturer.

China’s EV Strategy and Market Dynamics

China’s long-term approach to encouraging electric vehicle (EV) adoption involves strategic infrastructure development, direct financial incentives, and supportive policies. The government has provided substantial subsidies for EV purchases, invested heavily in charging infrastructure, and implemented policies to boost both supply and demand for EVs.

Additionally, China has fostered innovation in battery technology, with companies like CATL holding one of the highest numbers of global patents. It has also secured a dominant position in the global EV supply chain.

Recently, one of China’s largest EV players offered significant price discounts, leading to selling pressure in the sector. However, these discounts are likely no more than a low- to mid-single-digit percentage and should be viewed as part of an advertising and promotional strategy.

Concerns about a potential price war could act as a near-term share price overhang, prompting profit-taking, even though dealership traffic has increased.

It is advisable to closely monitor sales volume trends and the upcoming second-quarter results for signs of margin pressures and their impact on company profitability.

Ongoing Competition and Market Outlook

Despite near-term pricing pressures, the Chinese EV market continues to show strong underlying growth dynamics. Domestically, the EV penetration rate has risen from 6% in 2020 to 45% in 2024, with market leadership still concentrated among key players like BYD and Geely.

China is also building on its dominance in the global market, with Chinese brands now representing about 30% of the global passenger vehicle market and 70% of the global EV market. These trends are expected to continue.

A key risk to watch is the persistence of price warfare if volume growth does not recover, which could further compress industry margins and increase investor pessimism about the automobile industry outlook.

More broadly, concerns about price wars stem from the trend of “involution,” or nei-juan in Chinese, which refers to excessive and unhealthy domestic competition. The upcoming second-quarter earnings season will provide critical insights into the financial impact of current pricing strategies.