Wednesday, April 06, 2022
Pair Trade: Auto - Stoxx | European Automobile and Stoxx Europe 600
By Century Financial in 'Investment Insights'
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Risks & Assumptions
Europe's Auto Sector has cheap valuations - Brace for a Rebound
The global semiconductor shortage have forced production cuts at the world's largest carmakers, with many seeing problems continuing in 2022. As a result, European car sales hit a record low in October 2021. It's not just sales that are flirting with lows; it's valuations too. At a 60% discount to the broader market, the Stoxx 600 Autos & Parts Index just traded near its lowest relative forward P/E ever and, at a multiple of 5.7 times, is Europe's cheapest sector by far in absolute terms. Moreover, it trades at a 20% discount to the long-term average book value.
Source: Bloomberg
Date : 25th March 2022
Why the low valuations?
For more than a year, the global auto industry has struggled with a disastrous shortage of computer chips and other vital parts that have shrunk production and slowed deliveries. A new factor - Russia's war against Ukraine - has thrown up yet another obstacle. Critically important electrical wiring, made in Ukraine, is suddenly out of reach.
Chance for a turnaround
Concerns about the ongoing supply chain crunch are likely expected to come down in the second half of 2022. The damaging impact of the Russia-Ukraine war may be short-lived as harness makers are trying to shift production to Poland, Romania, Serbia, and possibly Morocco to reduce the impact of the disruption. Additionally, European Automobiles are setting up their base for electric vehicles to give tough competition to its American counterparts.
Sector Composition | |
Component | Weighting |
BMW | 17.16% |
Volkswagen (Preference) | 16.94% |
Mercedes- Benz Group AG (DE) | 16.47% |
Valeo | 7.40% |
Porche Autobomil Holding | 7.30% |
Renault | 7.07% |
Michelin | 6.87% |
Stellantis NV | 6.87% |
Faurecia | 6.71% |
Continental AG | 4.90% |
Vitesco Technologies Group | 2.29% |
Source: CMC Website
Date : 4th April 2022
EU automobiles are anticipated to ramp up production with 35 new vehicles due in 2022-23, giving tough competition in the luxury car segment. BMW, Mercedes, Stellantis, and VW are prioritizing battery and software development to boost their tech credentials and close the valuation gap vs. Tesla and pure-play BEV startups. The EU Automobile share basket's most significant component BMW, targets over a 10x increase in BEV sales by 2025 that will boost the company's EBIT and revenue numbers. Several productions in the pipeline are expected to improve their valuation figures that will reflect well in the stock for patient investors
Ratio Chart
Source: Bloomberg
Date : 4th April 2022
The ratio between Stoxx 600 Autos and Parts (substitute for European Automobile Share basket) and Stoxx Europe 600 is currently trading at 1.27, and the anticipation is that the ratio will increase further on the notion that European Automobile will perform better than Europe 600.
Risks and Assumptions for Back-tested trading strategies
Data Source: Bloomberg
Data & Prices as of: 06/04/2022
Arun Leslie John
Chief Market Analyst
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