First it was the pandemic, then rising interest rates that battered listed property trusts. For those who might be tempted to get back into this market, their investment shopping list should include five key factors before taking the plunge.
With EY predicting a pick-up in the private credit market, the need to understand the risks inherent in this investment strategy that’s nearing $200 billion in assets under management has never been more important.
Battery boom in charging up portfolios
Even though Lithium Boom II is well underway, there may still be time to jump on board the bandwagon and capture significant upside from battery material manufacturers. Despite some staggering company performance, it is clear that the future of the global economy is battery-powered, with investment required at a scale scarcely believable.
The lithium boom taking place in Europe and the US is driven by future demands for lithium use in electric vehicles and solar power. In part, the rebound occurred after President Joe Biden indicated that he would support increasing production of crucial metals used to make electric vehicles and solar panels as part of his “net zero emissions by 2050” climate plan. This led Tesla founder Elon Musk to recognise the potential that lithium deposits could provide to create long-life and low-cost batteries to the EV battery market. Tesla alone needs a lot of lithium.
The coronavirus pandemic also changed the outlook for lithium. The virus had a big impact on downstream demand, which in turn put pressure on pricing. Like Europe, the US is looking to take control of its own raw material supply chains. The pandemic looks to have driven US, European and Chinese car makers to create electric vehicles and with that will come the demand for more battery-ready lithium than the world can supply. And so investors are looking for the next Tesla.
A few battery companies believe Lithium-ferro-phosphate (LFP) batteries are the way of the future. Unlike the ones required by Tesla, these batteries don’t rely on nickel and cobalt Lithium Australia (ASX: LIT) says the use of LFP simplifies the supply chain by reducing exposure to nickel and cobalt.
Below are some of the companies along the battery supply chain that are listed on the ASX:
As you can see there are some spectacular gains made by some of these battery stocks. One of the more popular ways to play the sector is via ETF Securities’ Battery Tech & Lithium ETF (ASX: ACDC) exchange-traded fund which now has over $100 million in assets under management. It has been one of the best-performing ETFs in the last 12 months, having gained over 60%.
The ETF gives investors “exposure to the energy storage and production megatrend, including companies involved in the supply chain and production for battery technology and lithium mining. Demand for energy storage is being driven by the movement towards emissions reduction and renewable energy, such as solar and wind.”
ETF Securities says “ACDC aims to provide investors with a return that, before fees and expenses, tracks the performance of the Solactive Battery Value-Chain Index. The Solactive Battery Value-Chain Index represents the performance of companies that are providers of electrochemical storage technology and mining companies that produce metals that are primarily used for the manufacturing of battery-grade lithium batteries.”
And it uses a full-replication strategy to track the index. Which means it holds all of the shares that make up the index. It is equal weighted, meaning each holding makes up the same portion of the portfolio each time the index is rebalanced and therefore contributes equally to overall performance.
In summary, battery technology is likely to remain among the most popular sectors in the world, with the electrification theme getting a tailwind from the new Biden Administration. Yet as we saw several years ago, it is both a high-growth and highly volatile sector.
