Friday, 17 May 2013

Companies Focus – Global Autos 11 – Beyond the European ‘Market Correction'.

During the undertaking of the previous “Coupled Ratios” of the eleven global auto companies (dated 20th March 2013), there was general sentiment that ever-rising markets required a 'breather'. A period of positive profit-taking and re-appraisal, via which investors would reconsider macro and micro conditions. This the investment community's behavioural norm which (it is believed) avoids the bursting of any bubble-effect and so even greater fear-driven losses.

Contrarian Stance... -

With an eye on the long-term, and recognising this early phase of the 'European Transition' period, in a semi-contrarian manner which sought to assist real-world economic dynamics – namely concrete and not paper-based investment sentiment - investment-auto-motives sought that the investment community over-come the usual temptation for near-term profit-taking. Instead provide for the creation of a new substantial 'market floor' which would in turn quicker aid the still fragile 'Main Street' economy.

Given the record difference in the size of the inverse relationship between central bank base interest rates and unemployment rates – a prime historic indicator of the beginning of an eventual long-term bull market – the notion of a much needed market correction was questionable.

...The Pavlovian Reaction -

However, press-driven mini-bubble concern and accordant market reaction saw European markets take that 'breather'.

Its positive upside has been a fresh bout of 'bargain buying', with from a 'technicals trending' basis, some equities at multi-year lows. Furthermore, the strength of recent rally highlights that many still see various equities – cyclically orientated especially – as under-valued given expected future earnings, even if their present valuations seem 'middling' given s still very much constrained B2C and B2B real-world economy devoid of much public sector (government) and private sector (household) consumption.

Hence the markets 'correction' and rebound:

Between 14th March and 18th April, the FTSE 100 rebounded to above former high of 6,529 to 6,243, thereafter rallying to presently about 6,673. Over that same period the CAC 40 moved from 3,871 to 3,599, then rising to now at about 3,977. The DAX 30 saw 8,058 go to 7,459, then climb to a present approximate 8,353. The AEX moved from 356 to 340 in a similar timeframe. The IBEX 35 went from 8,658 to 7,787, re-rising to about 8,571. The FTSE MIB in Milan saw its previous high at the end of January, at 17,892, dropping to 15,154 by early April, now at about 17,410.

In contrast to Europe and its sovereign, inter-banking and fiscal woes, the American S&P 500 shifted less so, between 11th April and 18th April shifting from 1,593 to 1,541, pulling hard thereafter to about 1,650. (Its earlier 'correction' came earlier in Oct-Nov 2012). Whilst the previous stable traction of the NASDAQ was momentarily de-railed by the collapse of Apple Inc's shares, before re-setting its previous trending course recently.

However, what is evident from European and American dynamics is that investment appetite is still very much the case; seemingly from both re-charmed domestic investors, and those in EM nations seeking to re-allocate liquidity The primary difference being that:

1. S.Europe being more politically and economically fragile appears to be more speculatively driven, hence its proclivity toward sharp yet range-bound lows and highs (buys and sells)

2. N.Europe appears more schizophrenic, the main markets driven by a mix of fundamentals and the 'drip-drip' of good and bad economic news stories, the good over-powering the bad given the pro-investment mood, whilst the smaller SME related bourses appear 'range-bound' with step increases.

3. USA has gained from greater overall PESTEL constancy, even through 'fiscal cliffs' and 'sequestrations', so a greater market confidence and rising stability; though may expect another small '6-month market' correction soon.

As for the 'big picture' perspective, as mentioned before, the idea of a bonds to equities 'great rotation' has under-pinned the stock markets may be a partial anathema, simply the case that the great mass of additional liquidity injected via QE has both increased bond market volumes and so depressed yields (seen in today's chasing of record 'junk-bond' sales), with a portion of that new liquidity being directed into equities and a natural shift from very low-paying bonds (some pushed negative because of active monetary policy to buoy equities) into the stock market.

This then gives a very basic summary of present western market conditions, and whilst interesting market movements are occurring elsewhere across the world in the BRIC economies (as they seek to re-strengthen a loss of growth momentum), investment-auto-motives' immediate focus for the present is upon the large automotive corporates.

The Global Autos 11 -

Whilst the next web-log will provide an updated “Coupled Ratios” analysis review, looking at each companies fundamentals, this commentary seeks to observe the opposite side of the coin.

Namely, a basic market related perspective of time-line gains (and some losses) over the last year.

The Year to Date -

The last twelve months is viewed as critical by investment-auto-motives, given the loss of EU vehicle-buying corporate and consumer confidence in H2 2012. Previous rebound traction had been seen but the Greek and Italian economic jitters undermined the continent's buying. This then unfortunately mimicked contraction in China, S.Korea and Japan, which themselves had partially relied upon either governmental or manufacturer incentives. Furthermore Brazil has seen gradually vehicle sales and India a relatively sharp decline, the former a macro outcome, the latter the combination of inflation concerns and fuel duty policies.

Only N.America has maintained a stable upward trajectory, moving from approximately 12.5m units per annum in the sales trough to about 16m today, this strong rebound induced by the effect of credit starvation with manufacturer cost-base restructuring, followed by massive QE liquidity, and the ability of domestic manufacturers to both gain from US patriotism and the previous FX advantage against Japanese, European and S.Korean 'imports' (though often assembled within the US). That quick 'out of the blocs' start provided the Detroit 'Big 3' with early and strong in-market gains, the expansion of the market itself now allowing the non-domestic VMs to enjoy their much needed sales share.

Hence unsurprisingly those with greatest exposure to Europe (such as Peugeout SA) suffered the greatest (yet also arguably offered very short and good long-term investor potential). Whilst those with a far greater worldwide coverage (such as VW, Hyundai) and so far less diminished profitability, effectively remained the investor darlings. Yet local issues had large affect, the European market correction seeing VW's share price dragged far lower than fundamentals would suggest.

Hyundai Motor was forced to cope with the domestic uncertainty of a militarily aggressive N.Korea (which periiodically heavily depressed its share price), whilst Japanese producers faced retracted demand from anti-Japanese consumers given the territorial dispute. And now premium makers such as BMW, Daimler and VW(Audi) face a theoretical slowed rate of growth given the impact of the China's new leadership stance, frowning upon overt ostentation.

The German Brand Exception -

However, as per 'the Germans', investment-auto-motives suspects that the PRC leadership will not classify German-badged premium cars as targeted luxury goods, given their relative visual conservatism (versus stable-mates such as Bugatti, Lamborghini, Bentley and Rolls-Royce [and Italian Ferrari, Maserati]). Nor indeed will the German marques be acquanted with imported high fashion personal apparel goods ranging from Prada to Gucci to Cartier to Rolex. The important difference is the the German marques are assembled inside China, which in turn strengthens the local supply-chain and therefor regional econimies, aswell as aiding the domestic sector's own technology cross-fertilisation and adoption. Thus VW-Audi, BMW and Daimler remain special cases largely beyond the consequences of a renewed Sino-conservatism. Furthermore, any such loss of Chinese high-end luxury and supercar demand will be off-set by the resurgent US economy, itself keen to champion conspicuous consumption to buoy aspiration and confidence.

Japanese Self-Help -

There appears to have been much speculation that the liquidity fruits of 'Abenomics' will be largely directed at foreign bond and stock markets, offering better yields that domestic Japan.

No doubt Japan's government via its prime financial institutions will direct a portion of funds externally given the need to finance indebted public spending, the expanded Yen's money-base creating a method of 'carry-trade'.

However, it seems also likely to be the case that a sizeable portion of the 'freed funds' be deployed domestically, as has obviously been seen before but at smaller levels. The difference today being the American domestic precedent, and the lesson that a large QE injection of funds into re-structured industry has a rising tide effect.

The homeland Fukushima experience, creating a less expensive patriotic labour supply, together with re-organisation of its Asian-based supply-chain (after the Thai floods) has meant that Japan has decreased its overall costs, added capacity, and able to retain a greater proportion of the 'value-added', and so profit margin, in the country. This then sets the scene for a resurgent Japan, able to re-expand its foreign sales with renewed pricing power capabilities in a lowering Yen environment, able to provide its own citizens with much desired employment stability and so domestic spending confidence, and the best of Japan's industry still in or near its competitive prime, seeing a two-fold income effect from overseas and domestic revenues streams.

So, a long-lasting policy of an ever weakened Yen would see the value of increasing foreign purchases gain an FX boost upon funding repatriation; but of more importance is domestic policy and the new BoJ funds progressively fed into the TSE, bond markets and directly into domestic corporations.In order to provide sheer balance sheet muscle for what have been heavily depleted Japanese firms. Moreover, the question is what else has Japan technologically conjured-up in its corporate research departments, ready for global deployment?

[NB This, investment-auto-motives believes, is why the activist Hedge Fund manager Michael Loeb is seeking greater say at Sony, along with divestment potential, which Sony is wise to resist].

Regional SnapShot -

So presently we see a re-energised America, a still struggling Europe, the BRICs experiencing 'policy re-orientation' with slowed growth (most easily effected in China), Japan well re-strengthened, and S.Korea incrementally losing its comparative productivity strength.

The Auto Producers -

With regards to the automotive players, and their respective stock performance over the last year - vs fundamentals view of “Coupled Ratios” - the following table provides a simple summary of how the stock price of each manufacturer has performed over the long, mid and short-term stages of the last year.

Common Stock Performance -
Over Previous Periods
as of 15.05.2013:

(view accompanying graphic)

1 year:
Renault = 78%
Toyota = 58.56%
FIAT SpA = 47.42
GM = 47.3%
Ford = 40.6%
Honda = 23.78%
VW = 23.15%
Daimler = 21.2%
Hyundai = 20%
BMW = 10.79%
PSA = -24.2%

6 months:
Renault = 66.6%
Toyota = 54.7%
FIAT SpA = 47.25%
PSA = 41.3%
Ford = 35%
GM = 32.1%
Honda = 31.67%
Daimler = 29%
Hyundai = 20%
BMW = 17.1%
VW = 8.3%

3 months:
Toyota = 21%
Hyundai = 19.4%
Renault = 16.4%
GM = 13.65%
FIAT SpA = 13.5%
Ford = 9.6%
Honda = 8.36%
Daimler = 4.58%
BMW = 2.32%
PSA = -1.77%
VW = -8.6%

1 month:
FIAT SpA = 23%
Renault = 18.16%
Daimler = 16.6%
PSA = 13.6%
Toyota = 11.8%
Hyundai = 11.5%
VW = 10.5%
BMW = 10.34%
Ford = 10.2%
GM = 9.1%
Honda = 4.6%

5 days:
FIAT SpA = 11.6%
Renault = 11%
PSA = 10.3%
Daimler = 6.6%
Toyota = 5.8%
VW = 2.35%
BMW = 1.3%
Honda = 1.1%
Hyundai = 1%
Ford = 1%
GM = 0.3%

Observations -

Renault (ie Renault-Nissan) has out-performed its counterparts by a wide margin, much of that gain over the last 6 months, as either a sector leader or within the top-3 at each measured interval. This from mix of Nissan's exposure to the USA and Renault's successful labour negotiations; but much hoisted by broad speculation regards France's and the EU's general economic rebound, from mired lows. As to whether Renault's stock can weather France's present social unease with the lacklustre traction of Hollande's presidency (though itself an unrealistic expectation) remains to be seen.

Likewise Toyota has seen an impressive pull, this perhaps more convincing given its autonomy over its industrial structure, massive influence regards BoJ currency policy and its large presence in up-turn USA.

It held its strong position for 9 months of the 12 months seen, only recently slipping down the leader-board.

FIAT SpA (ie FIAT-Chrysler) has seen a strong rebound from its lows, a mix of expectation and sales delivery from Chrysler in the N.America, and of course basement-bargain picking at price lows; suffering in high exposure Europe and S.America. Thus seeing 3rd, 3rd, 5th, 1st and 1st positions. Hence its speculative strength held for the first half of the period, then fell, before returning in recent weeks. That recent gain, like many Italian equities, based upon new (though returned) domestic political leadership.

GM has seen initially 'middling' and latterly 'low' performances, this predicated on the tail-end of a QE push, thereafter partial loss of N.American market-share as the Japanese return, international bias to lower margin small and medium vehicle sales and a still struggling GME division in Europe.

Ford has experienced similar overall conditions, 'middling to low' though positively enjoying continual success in China with its Fiesta small car (vs GM and Japanese).

Honda, unlike its Japanese peer, has seen middling to low performance across the last 12 months, seemingly more affected by the China's 'consumer embargo' on Japanese vehicles, and with a slightly higher price position to Toyota in the US yet to enjoy a full boost in sales (itself looking to more expensive offerings in x-overs and sub-compact cars.

VW, though perhaps the industry titan, has suffered throughout the year in comparison, with low-middling and lowest price performance. Yet this is not surprising since it has seen its stock-price rise over the preceding 3 years with only large upward 'humps' upon the stable rising trend. Hence the recent European contraction offered a rewarding moment for accrued profit-taking, hastened by corporate remarks that the market “over-expected” from VW in 2013. This possibly a ploy to 're-set' the inflated stock-price and so provide a welcome entry point for 'bond to equities rotating' large institutionals.

Daimler's performance could be described as 3 periods of 'low-middling' recently followed by 'high-middling' over the last month. But it appears to be climbing the performance chart with a steep angle climb, presumably based upon the earnings potential of Trucks and Cars in the US, (the latter expanded by compact CLA) with a cadence-like follow-on latterly in N.Europe, thereafter the BRIC nations.

Hyundai has been generally low-middling, altered by a 2nd position three months ago. Seemingly forever on the lowest of price-earnings measures (because of its XETRA ADR status) and therefore a constant statistical favourite) its loss of 20% or so on the KOSPI over the last 9 months has seemingly engendered continuation of its 'peaky' range-bound, gradual rise trend on XETRA. Hyundai grew its domestic market-share through the recent N.Korean induced economic worries, has mass popularity in China and an ever growing acceptance in N.America (even through the mpg scandal) and in Europe, all thanks its much improved vehicle range and brand persona.

Overview -
The last 12 months have been largely a long-awaited stock-price (and so corporate) positive re-valuation. Much of that seen over the last 6 months which ironically has also seen depleted broad economic confidence in many global regions. However, it seems that having seen the previous American market 'breather' and the recent European 'correction' different investor types are confident in accruing both short-term (buy on the dip, sell on the high) and long-term positions.

Like many cyclical sectors, performance was and still is obviously heavily related to macro-economics and the issue of policy deployment within both indigenous and foreign markets.

Presently though it appears that America has and continues to be perhaps the prime income region for all global manufacturers.

With liquidity and credit 'trickle-down' seeping into corporates, large businesses and the more credit-worthy consumers first; with their own vehicle fleet renewals and premium car rewards for Presidents, V-P's and senior management. Thus supporting premium car demand.

Thereafter as employment improves yet further, employee earnings income will better sustain mid-size, compact and small car sales from all auto-producers, especially so Japanese and S.Koreans.

Critically, it will be the rate of new construction projects, primarily infrastructure and domestic housing, as opposed to office and retail space, that will underpin the high margin commercial vehicle pick-up truck and van sales: giving the Detroit players a home sales and income advantage.

Yet these VMs must best manage all global regions: maximising exposure to up-beat regional markets and shrinking fixed and variable costs in down-beat geographies. So managing European fragility and the BRIC contraction is perhaps key to defining modern world-class performers; not simply 'rising-tide' winners.
The task, as ever, for auto-sector investors is to stock-pick when timely and prudent, balancing the mood of the market, inter-regional sales dynamics and corporate prospects and fundamentals...a focus on the latter to follow with a “Coupled Ratios” review.