Our theme of EV Supplier stocks has fared relatively well this year, rising by about 19% year-to-date, compared to the S&P 500 which was up by about 7% over the same time frame. The rally comes after a tough 2022 when the theme declined by about 21% on account of supply chain-related issues, aggressive rate hikes by the Fed, and Tesla’s move to slash prices on some of its popular models later in the year. So what’s driving the recent rebound in EV supplier stocks and what’s the outlook like for 2023?

Now, EV adoption has been resilient despite some recent headwinds. Market research firm Motor Intelligence says around 807k fully electric vehicles were sold in the U.S. through 2022, comprising about 5.8% of all cars sold. This is up from just 3.2% in 2021. There are a couple of developments that have helped the theme in recent weeks. Firstly, inflation has been cooling, and the Federal Reserve has scaled back on the pace of its interest rate hikes. The most recent hike stood at 0.25%, down from multiple rate hikes of 0.75% last year. Moreover, China, the world’s largest EV market, has also scrapped its zero Covid policy and this is likely to help the broader EV ecosystem and demand. Major automakers also continue to sign deals relating to EV batteries and related components, as they look to ensure supply growth and cost stability. For example, Tesla recently signed a deal with Magnis Energy Technologies to secure supplies of graphite, while GM invested about $650 million into Lithium Americas.

The longer-term picture also looks promising. The total light vehicle market stood at about 90 million units in 2019, before Covid-19 and supply chain-related disruptions hit the automotive market. It’s quite likely that the passenger vehicle market will transition almost entirely to EVs in the coming decades, providing considerable room for growth for EV suppliers. Moreover, unlike the current scenario where EV players such as Tesla are vertically integrated, producing their own vehicles and software systems, there could be more scope for specialization within the EV supplier space.

Within our theme Aptiv stock,, a company that provides a range of solutions for the auto industry, including autonomous driving technologies, safety technologies, components, and wiring, has been the strongest performer, rising by about 28% year-to-date. On the other side, Amphenol Corporation, , has underperformed a bit, rising by just about 6% over the same period.

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