So, bearing this in mind, it is interesting to look at market cap developments in the electriccar, traditional auto and Russian energy space. It is abundantly clear that the changedand very positive perception of EV take-up is closely associated with a more negativeperception of both traditional automakers but especially the Russian energy sector. Weunderstand concern about supply-side disruption, because the data suggests it’s alreadyimportant. On the demand-side, however the numbers are a lot less convincing.
In this context, we were struck by a recent speech by Amin Nasser, the President ofAramco at the World Petroleum Congress, Turkey, 10 July 2017; “To begin with, if ourhistory is any guide, there can be little debate that the energy transition already underwaywill be a long and complex process. It took coal more than a century to partially displacebiofuels and reach a share of 50%. It took oil 80 years to do the same… looking at today’senergy mix, the expectations for alternatives are through the roof. But while electricvehicles are making progress, the reality on the ground is that they make up less than twotenths of a percent of the 1.2 billion total vehicle fleet. Even under the most aggressive 2degrees climate change scenario, the IEA still does not see that share reaching 10% by2030. As for renewables, they are also gaining ground. But their intermittent nature andthe need for large electricity storage and grid stability, are still major challenges … In otherwords history is repeating itself”.
The central valuation issue relates to the likely trajectory of technological change. Ifinvestors are very excited – possibly too excited – about the scope for positivetechnological change, the flipside is that they will tend to under-estimate warrantedvaluation in the sectors threatened with decline. It could take a surprisingly long time fordividends to be paid in the sunrise segment – while the yield in the sunset sector could besurprisingly persistent. The question we ask investors is whether the current marketcaps in the auto and Russian energy sectors could be suggesting this possibility?
Most investors we have talked to have focussed on supply, but demand is alsointeresting. In particular, there has been considerable excitement about the likely adoptionrate of electric cars (EVs).
Here are a few charts illustrating the potential attractions of Russian valuations. Russianequities have this year been a casualty of excitement about energy sector disruption.