Sept 20 (Askume) – European auto stocks are now so unpopular that investors are slashing exposure while the scale of the industry’s problems has pushed valuations to historic lows, often a signal of trouble for potential buyers.
The STOXX 600 Auto & Parts Index (.SXAP) has been one of the worst performers this year. Analysts expect profits to fall 13.6% in 2024, a reversal from the post-pandemic years when supply chain issues gave automakers license to raise prices.
Investors believe that complex technological changes, fierce competition from Chinese entrants and increasingly price-conscious consumers make deep cost cuts inevitable during a recession.
He said economies of scale were important, especially for big brands such as Germany’s Volkswagen (VOWG_p.DE) that operate locally.He has clashed with unions over unprecedented plans to close factories, partly because of competition from China and rising labour and energy costs .
European cars currently trade at a record 60% discount to the broader market, represented by the pan-European STOXX 600 index (.STOXX) . Still, a Bank of America survey this month showed the auto industry was the most underweight sector among regional fund managers, with $284 billion under management.
“This toxic combination – China weakness, prices coming off their highs, no volume growth, rising labour costs – leaves room for these stocks to take a hit, and if things get worse, some of them could easily fall 10-20%.
“The valuations are really cheap, but we’re not promoting the industry at all.”
Are there more warnings to come?
Shares of Volkswagen, BMW (BMWG.DE) , Mercedes-Benz (MBGn.DE) , Renault (RENA.PA) and Stellantis (STLAM.MI) have fallen 29-50% from their highs this year to their lowest levels in several months.
Gilles Guibaut, head of European equity strategy at AXA Investment Managers, said: “The Western auto industry is facing major challenges due to China’s gains and people do not want to invest in electric cars as they did a few years ago. Spend so much money” this.
“Either you can raise your prices and justify the premium to your customers, which means your brand deserves it, or you have to cut costs – there’s no other option.”
EU car sales fell more than 18% year-on-year in August. Sales of all electric vehicles fell 44%, mainly due to lower sales in Germany and France, the bloc’s biggest markets for electric vehicles.
“We’re probably going to get a lot of profit warnings that suggest now is not the time to buy the auto sector on dips,” said Andreas Bruckner, investment strategist at Bank of America.
Price Traps
EV demand has fallen so sharply that several major automakers have scaled back their electrification plans, with Sweden’s Volvo Cars VOLCARb.ST abandoning its target of going all-electric by 2030 earlier this month .
“With electric cars you have to solve the fundamental problem, which is to generate the electricity in the first place and create systems that make the project viable,” said Carlo Franchini, head of institutional accounts at Banca Effigest.
“It is not recommended to bet on cars right now. Reducing risk is certainly not a bad idea,” he said, adding that he does not think families will prioritise buying cars.
Pulling out of electrification has its own risks. Renault CEO Luca de Meo recently warned that European carmakers that exceed EU carbon emissions limits in 2025 could face fines of about $20 billion due to insufficient demand for electric vehicles.
The sector is embroiled in a trade dispute between the European Union and China, with the EU imposing tariffs on imports of Chinese-made electric vehicles over what it calls excessive and unfair subsidies to Chinese manufacturers.
The possible return of former US President Trump to the White House could reignite the trade war with China, which would impact European automakers.
Chiara Robba, head of LDI equities at General Asset Management, said: “It’s hard to say if we have reached the bottom of the negative news for the sector: even if valuations are attractive, in the absence of a correction this could become a value trap.”
“The industry needs support for a radical transformation of the supply chain, manufacturing and charging infrastructure to aid mobility and increase demand for electric vehicles.”
