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19 Apr 2024

  Artemis | emerging markets

Artemis: What electric cars tell us about emerging markets

Historically, investors would access China through Western companies. Now, we are seeing the rise of domestic brands across a wide variety of industries, including electric vehicles. Raheel Altaf, emerging markets fund manager, explains why this should encourage investors who have not invested in emerging markets for some time to reconsider potentially outdated perceptions of the opportunity set in this arena.

FOR PROFESSIONAL INVESTORS AND/OR QUALIFIED INVESTORS AND/OR FINANCIAL INTERMEDIARIES ONLY. NOT FOR USE WITH OR BY PRIVATE INVESTORS. CAPITAL AT RISK. All financial investments involve taking risk and the value of your investment may go down as well as up. This means your investment is not guaranteed and you may not get back as much as you put in. Any income from the investment is also likely to vary and cannot be guaranteed.

It is not a brand you may be familiar with, but you may be soon. China’s BYD – it stands for Build Your Dreams – has overtaken Tesla as the world’s top-selling electric car maker1. The company, which began making vehicles in 2003, the same year as Tesla, produced over three million cars last year, including 1.6 million battery-only and 1.4 million hybrids.2

In four years China has gone from back of the leading pack of car exporting countries to the front, overtaking the US, South Korea, Japan and Germany. Other brands to watch out for include Dongfeng, SAIC (owner of the MG brand), Nio and Xpeng.

Sophistication

The electric car industry tells us much about China and about emerging markets generally. Its scale and sophistication are astounding and make me question the validity of this archaic term when so many countries in the category look pretty “developed” to me. BYD now has plants around the world, including Brazil, Hungary and India. Those who have seen its factories rave about the company’s technology – the only people seen on the factory floor are inspecting finished cars or fixing robots!3

Diversification

Much is reported here on the gloomy state of the Chinese economy. Amid that it is often forgotten what astonishing progress has been made there. China is the second-largest economy in the world. Two decades ago the average annual income was just $1,500, according to the World Bank. Today it is $12,850 – a near tenfold increase.4 The country is much less dependent on the US than it used to be and much more reliant on domestic consumers. So is East Asia generally, with China now the leading destination for exports in the region.5 Investors should take note of this gradual decoupling from the US. It makes China and the wider Asia region more useful as diversifiers within a global portfolio. And it means we should be more open to growing brands with their roots in emerging markets.

Historically, investors would access China through Western companies, such as Unilever, Diageo or Burberry. We are increasingly seeing the rise of domestic brands like BYD that are not only dominant at home but making an impact beyond.

It is not just cars. Look at smartphones and we find in China that brands like Huawei, Vivo, OPPO and Xiaomi have virtually pushed Samsung out of the market6. iPhone sales there fell 24% in the first six weeks of the year7. I bet I am not the only parent buying their child a cheaper, Chinese-branded phone in case it is dropped or lost. They are remarkably good.

From an ESG perspective, some may worry about China’s commitment to reducing climate change. The country produces more CO2 emissions than the next four biggest producers – the US, India, Russia and Japan – together.8 But consider CO2 per capita and China ranks 28th9. China’s reliance on coal is a problem, but it is the world leader in renewable energy and has ambitious targets to reduce emissions. It aims to cut them by 65% from their 2005 level by 2030 and be carbon neutral by 206010.

Other EV investments

The investment opportunities around EVs go across emerging markets. We have a big position in South Korea’s Kia motors, which is targeting 1.6 million EV sales by 203011, matching where BYD is today. It will have 15 EV models by 2027.12 Kia pays a high dividend – around 5.8% for 2023, challenging another common misconception – that emerging markets companies do not pay good dividends. Kia has also been buying back shares, suggesting management think they represent attractive value, too.

We do not own BYD at the moment, though our proprietary stock screening tool flags it up as a “contender”. Given how competitive the EV market is we are ultra-selective. Arguably a better way of accessing this growing market is through parts suppliers – and again emerging markets countries offer choice.

We also own Hankook, the South Korean tyre company – the world’s seventh-largest tyre manufacturer13. Some electric cars have as many as 3,000 semiconductors14 – twice the number in a traditional car. And that brings us to TSMC in Taiwan and also to South Korea’s chip design company, Novatek, which specialises in LCD displays used in modern vehicles. To this we might add another company we bought in China last year, Jiangsu Pacific Quartz, which produces a variety of quartz materials used in semiconductors.15

Autos and component parts are responsible directly for 6% of the Artemis SmartGARP Global Emerging Markets portfolio today, with more exposure through technology, materials and insurance. We see companies such as Gerdau (steel producer), Amara Raja Energy & Mobility (batteries), PICC (insurance) and Hon Hai (electronic components) as indirect beneficiaries.

I hope these companies will drive strong returns for us. They certainly should encourage investors who have not invested in emerging markets for some time to reconsider potentially outdated perceptions of the opportunity set in this arena.

1https://www.rac.co.uk/drive/news/electric-vehicles-news/chinese-car-manufacturer-byd-officially-overtakes-tesla-in-sales-of-evs/
2https://www.theguardian.com/environment/2024/jan/02/chinas-byd-overtakes-tesla-as-top-selling-electric-car-seller
3https://www.economist.com/business/2023/02/02/chinas-byd-is-overtaking-tesla-as-the-carmaker-extraordinaire
4https://data.worldbank.org/indicator/NY.GNP.PCAP.CD?locations=CN to 2022
5https://www.lowyinstitute.org/publications/east-asia-s-decoupling
6https://datawrapper.dwcdn.net/vC64H/2/
7Apple's iPhone sales in China plunge 24% as Huawei's popularity surges | Reuters
8https://globalcarbonatlas.org/emissions/carbon-emissions/
9Carbon Footprint by Country 2024 (worldpopulationreview.com)
10An energy sector roadmap to carbon neutrality in China – Analysis - IEA
11Kia Global Media Center : 2023 CEO Investor Day : Kia accelerates EV transition with target of 1.6 million EV sales by 2030 (kianewscenter.com)
12https://www.kianewscenter.com/events/all/2023-ceo-investor-day---kia-accelerates-ev-transition-with-target-of-1.6-million-ev-sales-by-2030/s/4432e086-3707-4026-ac57-94855cfc9a6a
13https://www.blackcircles.com/tyres/brands/hankook
14How Many Semiconductors Are in a Car? [Infographic] | Polar (polarsemi.com)
15http://en.quartzpacific.com

Capital at risk. All financial investments involve taking risk and the value of your investment may go down as well as up. This means your investment is not guaranteed and you may not get back as much as you put in. Any income from the investment is also likely to vary and cannot be guaranteed.

This is a marketing communication. Before making any final investment decisions, and to understand the investment risks involved, refer to the fund prospectus (or in the case of investment trusts, Investor Disclosure Document and Articles of Association), available in English, and KIID/KID, available in English and in your local language depending on local country registration, available in the literature library.

Risks specific to Artemis Funds (Lux) – SmartGARP Global Emerging Markets Equity

  • Market volatility risk: The value of the fund and any income from it can fall or rise because of movements in stockmarkets, currencies and interest rates, each of which can move irrationally and be affected unpredictably by diverse factors, including political and economic events.
  • Currency risk: The fund’s assets may be priced in currencies other than the fund base currency. Changes in currency exchange rates can therefore affect the fund's value.
  • Emerging markets risk: Compared to more established economies, investments in emerging markets may be subject to greater volatility due to differences in generally accepted accounting principles, less governed standards or from economic or political instability. Under certain market conditions assets may be difficult to sell.
  • China risk: The fund can invest in China A-shares (shares traded on Chinese stock exchanges in Renminbi). There is a risk that the fund may suffer difficulties or delays in enforcing its rights in these shares, including title and assurance of ownership.
  • ESG risk: The fund may select, sell or exclude investments based on ESG criteria; this may lead to the fund underperforming the broader market or other funds that do not apply ESG criteria. If sold based on ESG criteria rather than solely on financial considerations, the price obtained might be lower than that which could have been obtained had the sale not been required.
  • Charges from capital risk: Where charges are taken wholly or partly out of a fund's capital, distributable income may be increased at the expense of capital, which may constrain or erode capital growth.

Risks specific to the Artemis SmartGARP Global Emerging Markets Equity Fund

  • Market volatility risk: The value of the fund and any income from it can fall or rise because of movements in stockmarkets, currencies and interest rates, each of which can move irrationally and be affected unpredictably by diverse factors, including political and economic events.
  • Currency risk: The fund’s assets may be priced in currencies other than the fund base currency. Changes in currency exchange rates can therefore affect the fund's value.
  • Emerging markets risk: Compared to more established economies, investments in emerging markets may be subject to greater volatility due to differences in generally accepted accounting principles, less governed standards or from economic or political instability. Under certain market conditions assets may be difficult to sell.
  • China risk: The fund can invest in China A-shares (shares traded on Chinese stock exchanges in Renminbi). There is a risk that the fund may suffer difficulties or delays in enforcing its rights in these shares, including title and assurance of ownership.
  • Charges from capital risk: Where charges are taken wholly or partly out of a fund's capital, distributable income may be increased at the expense of capital, which may constrain or erode capital growth.

Investment in a fund concerns the acquisition of units/shares in the fund and not in the underlying assets of the fund.

Reference to specific shares or companies should not be taken as advice or a recommendation to invest in them.

For information on sustainability-related aspects of a fund, visit the relevant fund page on this website.

For information about Artemis’ fund structures and registration status, visit artemisfunds.com/fund-structures

Any research and analysis in this communication has been obtained by Artemis for its own use. Although this communication is based on sources of information that Artemis believes to be reliable, no guarantee is given as to its accuracy or completeness.

Any forward-looking statements are based on Artemis’ current expectations and projections and are subject to change without notice.

Third parties (including FTSE and Morningstar) whose data may be included in this document do not accept any liability for errors or omissions. For information, visit artemisfunds.com/third-party-data.

Important information
The intention of Artemis’ ‘investment insights’ articles is to present objective news, information, data and guidance on finance topics drawn from a diverse collection of sources. Content is not intended to provide tax, legal, insurance or investment advice and should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security or investment by Artemis or any third-party. Potential investors should consider the need for independent financial advice. Any research or analysis has been procured by Artemis for its own use and may be acted on in that connection. The contents of articles are based on sources of information believed to be reliable; however, save to the extent required by applicable law or regulations, no guarantee, warranty or representation is given as to its accuracy or completeness. Any forward-looking statements are based on Artemis’ current opinions, expectations and projections. Articles are provided to you only incidentally, and any opinions expressed are subject to change without notice. The source for all data is Artemis, unless stated otherwise. The value of an investment, and any income from it, can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested.


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