Recent weblogs sought to initially
provide general global macro-economic backdrop, into which each of
the ‘Global 11’ auto-makers could be respectively contextualised.
The obvious premis re-counted by investment-auto-motives is that
presently the world economy sits within a transition period, whereby
the Triad regions partly regain their notionally lost dominance.
[NB S.Korea now obviously seen as a
critical constituent of that 'Triad'].
Worldwide Geo-Economic Transition -
The noted slow-down of previously
stellar performing (credit fuelled) EM regions, re-affirmed again by
China recently, has become counter-balanced by a renewed, yet
cautious, faith in western economies.
This obviously reflected by
stock-market dynamics , each bourse notionally acting as ‘leading
indicator' given historical precedence for markets to either
foretell or prompt industrial and consumer activity. The fact that
such 'faith' is accompanied by the investment community’s increased
vocalisation for deep structural change, at corporate and national
levels, simply demonstrates a 'real world' recognition of the
immediate challenge if the once 'advanced economies' are to rebound
as before – before the BRIC and CIVETS story.
The phenomenon is perhaps most
prevalent and publicly visible within the automotive sector.
The US played a demonstrative role with
the wholesale deconstruction and reconstruction of GM, necessitating
a similar 're-engineering' both downstream and upstream of the value
chain, so that a new era of better value creation might begin.
Whilst very 'old news’ now, that
effectively pre-packaged bankruptcy, its cross the board
re-structuring and corporate re-emergence, effectively set the tone
for a necessarily slimmed, partially re-imagined global auto-sector.
Given the geo-economic power of the US, that singular action created
a domino effect. The Japanese mass manufacturers had to follow, and
did so in response to the challenges imposed by the natural disasters
domestically and in Thailand. Europe likewise, though without a
Chapter 11 process and thankfully no major natural disasters, the
process is slower. And today S.Korea, faces unsettling behaviour from
N.Korea, which itself may well sap economic confidence and so enforce
a round of commercial re-structuring.
European ‘Catch-Up’ -
With the US and Japan relieved of
operational drag issues, it has been evident that the mainstream
European players have had to respond likewise. Given the greater
intensity of regional competition this has been a slower process,
Brussels offering little more than rhetoric, itself recognising that
each European auto-maker, self-governed, parentally owned, or with an
inferred national remit, must balance short-term over-capacity and so
unit margin destruction, against the longer-term intent and
capability to serve an ever-expanding EU empire; in doing so
fulfilling local and national economic obligations.
Hence the circular European dilemma,
one which is compounded by the abject disintegration and
fractiousness of EU politics, which itself has created a 'core' vs
'periphery' split – itself re-emphasised recently by Italy's not so
comical political situation. So seemingly little possibility of any
pan-European political and industrial stabilisation 'pact' -
effectively offered by German economic and manufacturing might - such
an ideology effectively undermined by powerful American industrial
influence, eg FIAT-Chrysler and PSA-GM; aswell as the host of PE
companies scouring S.Europe for 'firesale' industrial assets (as
foretold by investment-auto-motives in 2008).
Whilst politically the Euro project
marches onward ideologically with geographic expansion, the
pragmatism of economics and finance means that the region is actually
less commercially cohesive than at any time since 1989. Beyond the
major auto-player alliances with America, the weaker industrial
players of that notionally unified 'single market' are being
swallowed by external American and BRIC private equity interests.
Good for the companies in question, with access to new financing,
co-operation within conglomerate / holding company structures, with
often access to new markets that can revive much needed export sales
Such an economically generated
commercial reality, together with obvious intra-EU political
ill-will, obviously undermines the idea of true pan-European
industrial and commercial cohesion...for all the efforts of
Volkswagen Group (with SEAT, Skoda, Lamborghini, Bugatti and Ducati).
This complex reality seemingly well
understood by Brussels’ given the Commission’s two-headed
approach toward the auto-industry: calling for plant rationalisation
yet also allowing state support; thus a pseudo- laissez-faire
approach to national industry and cross-border competition;
preferring a policy of remote interaction which in this instance
seemingly allows for free-market reign; itself dependent upon the
time-frame of central bank QE actions and liquidity availability. The
first to do so – ie the the USA – able to capture and influence
the optimal industrial assets.
Industrial Dichotomy -
Critically, European auto-players well
appreciate that the present near and mid-term western economic
deflation – instigated by “debt deleveraging”- will be
eventually be counteracted by ‘re-inflation’ – and so perceived
growth –as a direct and indirect result of trickle-down QE (itself
key to the process of industrial restructuring). So, ironically with
'jam tomorrow' effectively creating a disincentive to permanently cut
swathes of local capacity, instead companies having to dramatically
cut general fixed and variable overhead costs and so manage working
capital keenly, in order to survive and re-engage investors.
[NB basic theory posits that the
greater the imposed fiscal austerity and the greater the available
monetary plenty, the stronger and long-lasting the eventual economic
rebound].
So those mainstream regional players:
VW, PSA, FIAT, Renault, GM and Ford seek to balance their respective
'here and now' position with that of their inevitably positive
forecast future; and that is invariably interlinked with policy-led
expansion of American and European money supply .
Reduced QE -
Whilst 'Abenomics' seeks to provide
Japan with its own version of the American renaissance play-book,
the fact that Federal Reserve and the Bank of England have diminished
QE efforts in a phased manner over previous years. This the tail-end
of very necessary policy tool intervention which simultaneously
inflate monetary policy (money supply) whilst deflating what had
become over-extended (ie debt-ridden) fiscal policy. Both designed to
act in concert so as to create what could be termed an economic
'transition stage'.
Those QE programmes, in their various
guises, have obviously been executed in decreasing tranches, yet at
dose measured deemed powerful enough to counteract what even until
now have been often inverse industrial and consumer activity reports
– formerly the demand side shrinking as the supply side rose. That
has now reversed for the UK and fortunately an even better balanced
for the US with job growth; as the Fed's 'beige book' analysis shows.
So optimism is in the air.
Here in the UK the BoE's Monetary
Policy Committee countering departing Governor Mervyn King's
expectation of another QE injection, leaving the base rate at 0.5%,
thus inferring cautious positivism; itself stemming from impressively
rebounding retail sales, including big ticket items such as cars and
buoyancy in the housing market.
Speculation vs Fundamentalism -
At long last the optimism and
'traction' of Wall Street appears to be infusing Main Street, and
whilst a noted liquidity shortage has affected SME's (requiring their
own cash cushions to see them through), improved credit, debt and
equity conditions have undoubtedly bolstered the fortunes of listed
companies of all sizes across most western markets.
However, recent events in Southern
Europe have once again raised investor concerns.
Greece recently missed its budget
obligations whilst paradoxically seeing youth unemployment fall, good
for momentary popularity, but creating investor concerns regards the
slackening of austerity measures. And of course Italian voters unable
to decisively democratically elect a convincing leader, the loss of
an unelected yet still effective technocrat and subsequent loss of
secure policy direction whilst promising an 'austerity unwinding' (as
possibly seen in Greece) only adds confusion. Such events, whilst
seemingly reducing national pain temporarily only serve to lengthen
it, as their respective economies fail to demonstrate initiatives in
meeting the evident global productivity gap (vs N.EU nations and EM
countries).
So whilst the ECB promise to “do
whatever it takes” to overcome the sovereign debt crisis, seen in
falling government bond yields, the fact is that such events shake
investor confidence. Previous confidence evident in the return of
volume stock purchasing has withered and stock shorting seemingly
re-appeared (FIAT SpA hit hard). And the plethora of zombie-like
private SME companies become ever more zombie-esque. The failure of
the public to fully appreciate the internal workings of the national
economic machine have given a return opportunity the market
speculators that had previously departed. Without orderly reform that
speculation trend will only continue and the industrial base grow
ever more weaker, so prone to what Germany would call a 'vulture
fund' attack.
As stated, fortunately the opposite
appears true for N.America and N.Europe.
Increasingly it will be a
fundamentals-based investment perspective, and not feverish market
speculation or rumour-mongering that will underpin the far more
stable present and future dynamics of national bourses. A far more
clear-sighted and very necessary practice, given the fact that future
western economic expansion and the concomitant wealth-effect will
have been based upon specific new-era drivers.
- regional and international QE
circulation
- risk-weighted credit availability
- the returned importance of
(regulatory influenced) investment banking
- changes in intermediary banking (with
“consumer brand banking” and new start-ups)
- obvious re-structuring of commerce
where required
- a cost-compliant workforce
- introduction of new regulatory
demanded employee pension schemes
- wear and tear capital goods and IT
replacement
- improved Triad and EM trading in
specialist arenas
- sizeable EM originated FDI into
western commercial sectors.
A New 'Platinum' Era ? -
As mentioned previously, 2012/2013 may
in the distant future become viewed as having been the true economic
turning point for what have been pummelled western economies.
A time when the previous 'rebound
fever' of QE inflated stock markets ceases, and the far more
rationalised investment behaviour of a broader and deeper investor
base, itself increasingly representing the interests of the masses,
finally emerges. Participants and markets largely re-attuned to once
again become more disciplined and discretionary.
Importantly, far more attuned to sector
and company fundamentals.
With this as the 'returned
rationality', the next weblog will re-run investment-auto-motive's
proprietary investment methodology...”Coupled Ratio
Analysis”...running the numbers over the 'Global 11' auto-makers.
