Thursday, 31 January 2013

Micro Level Trends – Global 11 VM Outlook – (Part 1) Setting the 2013 Scene

The first web-log of 2013 highlighted today's upbeat perspective within western capital markets; a bell-weather illustration undoubtedly seen in the substantial up-tick of auto stocks over recent months.

Improving Economic Stability -

This undoubtedly assisted by the on-going promise of ‘back-stop liquidity availability from the ECB through OMT across the EU, itself a confidence stabiliser which in reality hopes markets and economies will self-propel over the mid-term, this monumental action accompanies by postponement and dilution of the American ‘fiscal cliff’ by yet again raising the budget ceiling, which maintains a QE stance, relieves companies of a heavy tax burden so aiding investment impetus.

Quarterly economic indicators continue their habitual 'mixed' trend, whilst equities markets have, as ever, sought to pre-empt the improving broader economic climate, daily news stories reflect a general cautious attitude amongst the moments of delightful surprise: a prime example being America’s massive rebound in auto sales seeing a present 15.5m SAAR.

Hippy Capitalism and Global Convergence -

The second web-log of this year highlighted the pressing urgency for the west to form a new era of truly credible ecologically directed economic growth, “hippy capitalism” the short-hand mantra that should strike a chord with both the young 'Gen-Y' interns and apprentices, and the 'Baby-Boomer Generation' seniors at Board level.

In previous posts investment-auto-motives highlighted the renewed importance of globally harmonised products / vehicles that enable corporations to capture at a global level the 'harmonisation effect' seen by slow but powerful economic convergence of the notionally post-industrial 'advanced' triad region and the notionally newly industrialised EM regions. The ability to capture global market sales with as near a homogenius product as possible is the profitability panacea many companies seek. Whilst feasible in the FMCG sector, that goal is understandably somewhat harder to achieve, though far from impossible, within Autos. Having seen attempts at the global car in the past, prompted by recessionary times, with the likes of the 1980s Ford Escort and 1990s Honda Accord, the level of ultimate regional similarity was often necessarily diluted so as to compete within the regional norm of vehicle specification and value offering.

However, over the last 20 years the world has undoubtedly converged, through media coverage, the internet, regionally factorised production and distribution and of course an unprecedented level of physical global population.

Yet still in a positive way, regional cultural and auto-culture differences continue, vehicle types themselves often the very symbol of a locale, from Delhi's 3-wheelers to Dallas's 5th-wheelers.

North America's Metamorphosis -

Though not quite encompassing the vehicle idiosyncracies of the whole world, the recent Detroit Auto Show highlights a broad plethora of vehicles which embrace both ideals of the engrained All-American vehicles and the Global vehicle; with the eco-attitudinal technology of the latter having an obvious effect upon the former.

The common component enabled ‘global car’, which together with new efforts in international trade negotiations (such as N.A. – Europe) now lay the foundations for a much improved VM profitability. The much expected, finally arrived, economic rebound providing a concomitant on-going rise in consumer demand, which when leveraged by attained economies of scale throughout the supply chain provides dual tailwinds to per unit margins, future improved EBIT figures better sustained through to the bottom line and so shareholder value.

Factor such as weakened Dollar and Yen, with probably the same fate for the Euro, with maintained weakness of there the Won, indicates that the 2013 outlook for the Global 11Automaker appears sunny, even after enjoying the markets’ fair weather of late. The expectation that for auto stocks, Wall Street hand the baton to Main Street.

Yet for the moment, all except the very best performing global auto-makers, and those on a confident upward trajectory, are tending holding tight. Forced to maintain a low-cost re-fresh of established (historically “over-ripe”) product lines in order to defer heavy CapEx and muster extended profits from life-cycle extended cars and platforms.

Given that North America is the new hunting ground for profitability, given its 13.4% volume rise in 2012, little surprise that although the vehicles show a new level of ‘international’ aesthetic (though far from the modernist interpretation of internationalism) they are decidedly aimed at an increasingly multi-ethnic 21st century populace, where even the all too stereotypical Southern Red-Neck recognises the massive influence of foreign auto trends (eg. product down-sizing and the proliferation of diesel) which have in global volume sales terms overtaken America’s once dominant hold over global demand and TIV. Foreign owned US trans-plant production sites now necessarily offer an American made product which entwines with broader global consumer needs, and such creates cost savings to VMs which can eventually in part or fully be passed onto their consumers.

Thus it is ironically the “foreign-isation” of the USA which will ultimately assist the economic return of North America, just as its immigrant populations have done over the centuries. However, the USA maintains and forges its own culture, counter-culture and broad spectrum auto-culture, that evidently seen at Detroit in 2013.

In an obvious bid to stir the automotive emotions and spending optimism of the public, US muscle cars and Full Size Pick-Ups expectedly took centre stage.

North American sales are expected to climb by 5.5% in 2013, and the region itself is expected to take 18% of the 83m unit global TIV in 2013; so seeing some of its former losses comparatively re-gained as the Europe sees minimal growth and EM nations see a slowing.

With the US viewed as the engine of automotive industry growth this year, Wall Street aswell as Detroit will be measuring the strength of this upcoming year’s monthly sales figures with ever greater interest. But if they veer from expectation 'car alarm bells' will sound.

Managing Investor Expectations -

Yet although sales figures are indeed an important indicator, as seen with JLR in recent days, as one British television detective states...”it is not what you can see that is important, it is what you cannot see”.

This should evoke a constant reminder to all of the Global 11 auto-makers, so as to gain good traction as the winter snow and ice thaws, and hopefully slot corporate performance into top gear.

We sit at a critical point for the capital markets in general and the stocks of the auto sector specifically.

Grapevine rhetoric highlights a growing consensus that previous large scale players such as pension funds and more conservative asset managers are taking a leaf from those market bulls which have already gained from a substantial market climb over the past 2 quarters. The term “Great Rotation” has been coined, and the $18bn worth of liquidity poured into equity funds demonstrating a long awaited strengthening confidence that the possibility of share price capital gains are to be had in leiu of poor paying safe haven bonds and arguably over-priced defensive stocks that serve as “proxy-bonds”

Take a look at the price to earnings valuations of many and automakers, and some in particular – as highlighted by investment-auto-motive's “Coupled Ratios” Analyis – and bargains are still to be had, ironically the best seen with those with inherent defensive characteristics. Value is peppered all over the Global 11 stable, for various company specific reasons.

Although undoubtedly the major gains have been already seen, the “Great Rotation” may be seen as a golden period by which the market and investors entered a historically long shallow, but highly positive slope of value creation.

Post Script -

investment-auto-motives believes that JLR's nominal poor profitability within the TATA Motor's stable was possibly diminished so as to either a) reduce losses booked to the Indian parent division (via raised transfer pricing on engineering services), or to momentarily reduce JLR profitability so that it may show a new boost when seeking a possible book-running exercise prior to any IPO; ideally the 'lost' sum set aside in the conglomerate's accounts as reserves to be “rolled over” as a possibly necessary safety cushion.