2022 has been a rough year for nearly every asset class. It's actually quite rare for stocks and bonds to be down more than 10%, but it's also a reflection of how unique the particular circumstances were given raging inflation and an economy that is slowing but not enough to curb the Federal Reserve's aggressive hikes.
Therefore, we should pay particular attention to the sectors that managed to outperform amid this brutal bear market. Among these, lithium miners stand out given the group's outperformance, strong fundamentals, and attractive valuations. However, the sector does face a notable short-term headwind in that the economy continues to rollover, and the Fed doesn't seem ready to come to the rescue until more damage is inflicted or inflation breaks further. And, there's a longer-term issue given the economics of lithium mining and potential environmental issues.
The bull case for the sector is quite obvious. The transition from internal combustion engines (ICE) to electric vehicles (EV) is in its early innings. According to forecasts, EVs should overtake ICE cars by 2030 in terms of new car sales. This is a massive figure since about 67 million cars are sold every year. And, it'll have massive ripple effects given that entirely new supply chains will have to be built to enable this shift.
And, this is precisely why lithium and its miners are so appealing to investors. There's a great deal of uncertainty when it comes to predicting which automaker will come out on top when it comes to winning market share. It's also possible that the profits are limited if competition is particularly intense, and companies are willing to forgo profits. Possibly, the best evidence is to look at the moribund performance of traditional automakers over the last couple of decades, and Tesla's more than 60% decline from its high despite its status as the top EV company.
For an investor who is confident about the growth of EVs, lithium is ideal, because it's so integral to the production of batteries. However, investors should note a short-term headwind if the economy continues to weaken which would negatively impact demand. Another factor to consider is that lithium is quite abundant and cheap to mine. This means that anytime demand declines due to economic or industry issues, prices could quickly collapse.