Wednesday, 23 January 2008

Macro-Level Trends – Global Auto-Economics - General Outlook

The last 5 years have witnessed a schism of industrial and economic growth between notionally ‘advanced’ and ‘emerging’ regions.

Triad stock markets managed to remain buoyant thanks to general cross-sector performance, corporate performance underpinned by retained profits (cash-building) in large-caps and liquidity access bulging the balance sheets of mid and small caps.. High M&A activity, contained labour costs and relaxed corporate tax policies all assisting in boosting margins and sentiment. But in the last 12-18 months cost-push inflation has made itself evident, Eastern demand for energy, commodities and raw materials sorely affecting Triad general overhead & production costs. Thankfully, these creeping costs were off-set by the other ‘inert’ variables mentioned; the general picture concerning but risk-manageable. Triad growth would have been judged ‘healthy’ under normal historical circumstances – above par infact.

Obviously however, the last 5 years has seen the rise and rise of the BRIC+ nations, massively out-performing ‘old-markets’ progress, and so the similar story rolls-on today….but since mid 2007, with far greater contrast.

Besides the massive knock-on effects of the credit-crunch – rapidly constraining previously highly reliant corp liquidity & dividends – in the same period we have seen yet further dramatic rises in energy and commodity prices thanks to an ever more fragile geo-political conditions (Russia, OPEC, Venezuela. [As stated in the previous web-post, the mantle of ‘oil power’ has massively shifted in the last decade]. This ‘bottom-up’, production-linked inflation has now been joined by a ‘top-down’, consumer-linked version driven by domestic energy and food costs, thereby severely affecting consumer durables demand such as automobiles – a major dampening effect exacerbated by the critical, reduced credit access that enables auto-purchase.

Hence economic fundamentals have over the last 2 Qtrs rapidly deteriorated, the spiralling consequences of which have been apparent with the new year stock-market hard-hitting sell-offs, first apparent on the NYSE & NASDAQ, and this week through European, Japanese and Asian bourses. Theoretically the world’s economic framework has been decoupled from the US and in self-supporting demand that seems true, but under the visible surface indicators of international trade and Balance of Payment flows, more than ever the sub-surface, invisibly integrated financial framework demonstrates the spiders-web that has undone BRIC+ confidence in the last few days.
The previously positive outlook of banking, enterprise and policy-advisory economists massively altered.

Whether the theoretical ramifications of yesterday’s Emergency Federal Reserve Bank interest rates cut to 3.5% (down 75 base-points) has the trickle-through desired, we’ll have to wait and see. And although it has seen immediate US market reaction (in house-building stocks etc) how it will plays out to cautious US consumers and nervous global markets is anyone’s guess.

In the meantime, we can’t help but remember Alan Greenspan’s prognosis of late ’06 that the mature West has peaked after 2 centuries of industrialisation, looking at a slow trend of decline, with the future effectively belonging to Asia. That slow trend will obviously have periodic plummets and returns of its own, as we’ve just experienced.
Prior to the new year panic that improvement was expected at FY09, the FY08 expected as the trough. The EIU/Economist provides the global GDP overview:

Region ’07 ’08 ‘09
US 3.8% 1.8% 2.6%
UK 3.0% 1.9% 2.2%
Euro 2.7% 1.8% 2.0%
M-E (Saudi) 4.5% 6.0% 5.6%
China 15.0% 10.1% 9.6%
India 8.9% 7.7% 7.2%
Asia (Korea) 5.3% 4.7% 4.7%
Japan 1.7% 1.4% 1.7%

The reality of that ’08 decline came sharply and more heavily, we suspect, than these December Forecast figures illustrate. The next 2 years promise to require yet greater commitment from national and international companies to apply ever more reactive, flexible, risk-aware management policies. If not a case of manning the life-boats (thanks to the Fed’s actions) it will be a case of throwing overboard non-core divisions, functions, product-lines etc to pair-down corporate vessel weight.

For large automakers the efficiency drives we’ve seen for so many years in this ever tightening climate continue; investing in top-end intellectual capital to help steer whilst off-loading unproductive assets, whether plant, labour etc in an attempt to maintain momentum and critically ROI, ROE and focus on EBIT and ROCE. Of course given the present financing climate those who need to seek additional funding may be shocked by the risk-premium and spread lenders seek even with the US$ rate cut.

But undeniably that major cut will encourage investment both domestically by the US “Big” 3 to a degree and “New Domestics” (Toyota, Hyundai, BMW etc) to a far greater degree who have surely been $ hoarding their US earnings to maximise their investment value at such a time. They will be watching to see if the Fed can maintain the new rate given the inflationary pressures previously mentioned.

The rest of the global economy - especially Japan and S. Korea - will be watching on.

In terms of regional and global volume growth, the forecasts provided in Q407 by the likes of Autofacts, Polk etc were looking over-optomistic given the new year sell-off shock. This week we previously expected a 3-5% global capacity and sales drop (US data already priced-in), but the re-newed optimism should (again) theoretically be felt and return confidence to Q407 expectations. However weak US fundamentals such as reported employment figures and retail sales (that account for 70% of US economic growth) could, if continued, once again undermine the regional and global TIV for automakers and their suppliers.

We will undoubtedly see another round of rationalisation, stretching from the US to Europe, Japan and ‘Chi-ndia’. This made all the more possible by the 3 party inter-continental alliances that seem to be order of the day; such as Chrysler-Chery-Fiat and possibly Chrysler?-Renault-Nissan.