It Seems Too Gloomy for Autos to Raise the Roof

(Bloomberg) — Another epic fail. European stocks have tried several times this year to break a ceiling that’s been bearing down since July 2018. It seems there’s always a good reason to sell once that level is reached. This time, Europe’s macro data are to blame, with poor preliminary PMI readings. The manufacturing gauge keeps plummeting in Germany, which doesn’t bode well for one of the country’s top industries: cars.

German manufacturing PMI signaled “the sharpest decline in business conditions across the goods-producing sector since the depths of the global financial crisis in mid-2009,” writes IHS Markit. While France had held up until recently, weakness is now visible there, too. Just when autos look up, the poor data pull them back down.

It has already been a tough year for autos and parts makers. The sector has underperformed the Stoxx Europe 600. The industry is being weighed down by slowing economic growth, a shift to electric vehicles, tighter emission rules and the enduring trade spat between the U.S. and China — the largest automobile market.

German carmakers have been particularly affected, with multiple profit warnings from Daimler, while Volkswagen took a very pessimistic tone earlier this month. BMW has been the biggest laggard, deriving almost 20% of its revenue from China. Along with Daimler, it makes a staggering six of China’s 10 best-selling car imports. Europe still accounts for more than 40% of sales for both carmakers, with the macro backdrop weighing on a challenged market.

Dividend-wise, forecasts have been adjusted for German original equipment manufacturers, while futures show Renault’s and Fiat Chrysler’s payouts are still at risk.

What’s more, Citi analysts say that IHS’s forecast for a 0.5% decline in global auto production in 2020 is still “too optimistic” and anticipate it will fall 1% next year.

But despite downgrades, all stocks are still showing potential upside against the average price target. And the longer-term prospects could improve, particularly for BMW, according to analysts at Bankhaus Metzler. They see R&D investment peaking soon with a “real breakthrough” in the hybrid and electric market having a positive impact on car stock valuations. The broker raised its rating to buy on BMW and sees quality players in the industry as good mid-term investments.

In the short term, an external push might be needed. The German government has already vowed to help its car industry adapt to the new environment for cleaner vehicles, but the effects might take a while to materialize. The poor economic data might also pile pressure on European governments, particularly Germany, to provide stimulus. That would at least give carmakers a breather.

In the meantime, Euro Stoxx 50 futures are up 0.2% ahead of the European open, while S&P 500 contracts are up 0.3%.

SECTORS IN FOCUS TODAY:

Watch the pound and U.K. stocks as the decision from the Supreme Court on the legality of Parliament’s prorogation is due mid-morning on Tuesday.Watch the aftermath of Thomas Cook collapse. There are plenty of other companies exposed.Watch growth-sensitive stocks with exposure to China after Yi Gang, the governor of China’s central bank, has said the country is not in a rush to add further stimulus to the economy.

COMMENT:

“U.K. stocks are likely to face significant fluctuations in coming months, with Brexit matched by global trade as drivers,” Bloomberg Intelligence strategists Tim Craighead and Laurent Douillet write in a note. “Our fair value model scenarios point to a swing of up 6% on a smooth EU exit vs. down 245% on a radical Labour government with socialist policies. Oil, metals and interest rates also loom due to large sector weightings, making the FTSE 100 surprisingly dependent on U.S.-China tensions.”

NOTES FROM THE SELL SIDE:

The European steel sector should see some respite from the current subdued demand heading into 4Q on announced capacity cuts and safeguard revisions, Jefferies says upgrading Kloeckner to buy while downgrading Voestalpine to hold and Salzgitter to underperform.Veolia set at buy and Suez at neutral as Citi relaunches coverage of the French water utilities, with both seen offering good earnings growth and free cash flow generation. Veolia (PT EU28) is most attractive on free cash flow yield vs cost of equity; has solid earnings growth, with scope to accelerate.The failure of Thomas Cook further backs up Berenberg’s view that EasyJet will outperform on margins in the coming year, the broker writes in a note reiterating its buy rating on the budget airline.Liberum cuts Royal Mail to sell from hold, citing news that the CWU is to ballot members for industrial action, with a break-down in relations between the co. and workers likely to impact productivity.

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