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.
