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.
