In the last two years, financial markets have amply rewarded EV and battery companies. Until 2020, the financial performance of EV stocks did not show a significant difference at portfolio level1 with other automakers and was in line with overall market performance. At the close of 2019, the total market capitalisation of the selected 14 EV stocks stood at about 13% that of the top-ten vehicle manufacturers, and the EV index was slightly lower as well.

Since 2020, both the EV and battery indices have outpaced that of the top-ten automakers as well as the broader market benchmark. The Covid-19 crisis negatively affected all indices, but the pace of recovery varied. In the first-half of 2020, the EV and battery indices recorded robust growth 70% and 40% respectively. This period coincides with announcements of green recovery packages and net zero pledges in major vehicle markets, establishing the EV as a future mode of transport in Europe, Japan and Korea, among other regions. At the close of 2021, the market capitalisation of EV manufacturers was 60% higher than that of the top-ten automakers combined. Such high levels can be primarily attributed to Tesla, which accounts for 80% of the total market capitalisation of 14 pure-play2 EV companies.

In 2021, the EV and battery indices at hand remained above that of automakers and the broader market. The battery index outperformed that of EVs, reflecting the increasing importance of battery supply chains in major auto markets. The observed decline in returns for the EV index can be attributed to increased competition in passenger vehicle EV markets from traditional automakers. In 2021, the majority of the top-ten automakers expanded their EV businesses, making it more difficult to draw a sharp distinction between the pure-play EV makers and the top-ten automakers. This could have led environmental, social, and governance conscious investors to divert their investments from pure-play EV makers to a broader portfolio of auto manufacturers. OEMs are considering introducing their EV activity through separate initial public offerings in an effort to benefit from the higher market capitalisation enjoyed by pure-play EV makers. Financial markets believe that the future is electric.

Current market valuations for pure-play EV makers are significantly higher than for traditional OEMs relative to the number of vehicles produced. Tesla stands at USD 1.1 million for every vehicle sold in 2021, while NIO and Xpeng have between around USD 0.4‑0.6 million. Incumbent automakers stand much lower, ranging at around USD 0.01-0.04 million. However, most EV manufacturers lag behind in terms of profitability, with many reporting marginal or negative return on total assets.

The high valuation of stocks could indicate that pure-play EV makers have comparatively easier access to capital from public equity markets. This allows EV companies to expand production and R&D facilities, thus increasing the overall capital expenditure on road transport electrification. On these grounds, high valuations could reflect that investors believe that EV-focussed automakers will capture significant market share, become profitable and provide high financial returns in the future. This implied vision of the future of the automotive sector is in line with a rising number of government plans for the decarbonisation of road transport.

One of the key factors underpinning this surge in valuations is that investors are seeking more sustainable and climate-friendly investments. The role of government policy and regulation in providing positive market signals to investors is critical. The EU taxonomy for sustainable activities, introduced in 2020, which includes the manufacturing of EVs and batteries, was an important step to guide investors towards low-carbon industries.