recent rally caused by short squeeze By Investing.com

By Michael Elkins

China electric vehicle stocks rallied significantly during U.S. trading on Wednesday, with Nio (NYSE:) and Li Auto (NASDAQ:) both trading up around 20%, while Xpeng (NYSE:) saw shares grow as much as 47%. Deutsche Bank analysts believe that a large part of yesterday’s rally was caused by a short squeeze as investors were caught being too negative on the group given COVID and competition concerns.

With respect to COVID, Deutsche Bank believes policy is pivoting to a much more hands-off approach as illustrated by announcements made by local governments in recent days. Local officials are pushing to reduce testing requirements and phasing out full-scale lockdowns, despite increasing case counts. In recent conversations, Deutsche Bank found that many investors had been skeptical about whether the government was willing to act in a substantial manner following several false starts throughout the year. These new developments should be a positive for auto demand going forward as the COVID zero policies have forced many dealer outlets to close and delayed purchases, causing inventory in October to rise to the highest level since April.

Concerning Chinese electric vehicle companies such as Nio, XPeng and Li Auto, the analysts wrote “Looking at 2023, we do think there will be uncertainty on volume but in an improving macro environment where EV penetration pushes up (and maybe lithium carbonate prices come down in the back half), we find it difficult to have a super negative stance on the group.”

Shares of XPEV and LI are down 5.74% and 3.64% respectively in pre-market trading on Thursday, while shares of NIO are down 0.39%.