(Commonwealth_Europe) After a difficult year for European automakers, they are experiencing a sense of positive momentum in the sector. This shift is largely attributed to signs of additional stimulus measures from China, which have encouraged investors to take a closer look at the sector’s currently low valuations. The Stoxx 600 Autos and Parts Index has seen a gain of more than 4% in December, positioning it for its strongest month since February. Despite this rebound, the sector remains the worst performer in the broader Stoxx 600 benchmark year-to-date. Even with the recent uptick, carmakers still trade at a notable discount of over 50% compared to the overall index. Notably, Volkswagen AG is trading at a multiple of less than four times next year’s estimated earnings, highlighting the significant undervaluation in the sector.
This low valuation has prompted traders to seek bargains, particularly as automakers are seen as potential beneficiaries of recent Chinese stimulus measures. While concerns about China and U.S. tariffs on the sector remain, they have eased. Investors are hopeful that the worst-case scenarios are priced into the market and that the estimates for automakers’ future earnings have finally been adjusted to reflect the sector’s struggles. Daniel Schwarz, an analyst at Stifel Financial Corp., suggested that the strong performance in December is fueled by the belief that the earnings estimates are now sufficiently low and that new tariffs have been factored in, making the sector appear cheap relative to its potential.
The announcement that Honda Motor Co. and Nissan Motor Co. are considering a merger intensified the excitement, particularly benefiting Renault SA, Nissan’s partner, as its stock surged up to 7.4%. This move added a sense of optimism and excitement to the sector, indicating that consolidation efforts might help stabilize the market. Technical indicators, such as the relative strength index (RSI), which tracks the magnitude of recent price changes, also suggest that investor interest in the industry is growing. The RSI briefly entered overbought territory in December, a sign that the recent gains might be gaining more traction. This momentum is reminiscent of a similar situation in April, when the RSI reached comparable levels after two months of gains, suggesting that the sector could be poised for more upside if these trends continue.
Another contributing factor to the automotive The sector’s resurgence is the result of investors closing their short positions. Investors who had bet against the industry are now reversing their stance, further supporting the recent rally. Pierre-Olivier Essig, an analyst at AIR Capital, noted that this shift in sentiment could be playing a role in the industry’s recovery. Additionally, there have been some individual company turnarounds that have helped lift the sector. Stellantis NV, for example, had been one of the worst performers earlier in the year, but it received a boost after the ousting of CEO Carlos Tavares. Tavares had been criticized for failing to address the company’s declining sales, and his removal was seen as a potential turning point. Bank of America analysts have expressed optimism about Stellantis’s prospects, predicting an improvement in production volumes moving forward.
BMW AG also benefited from an upgrade. Analysts at Jefferies highlighted the company’s relative strength on key issues such as its positioning in China and compliance with emissions regulations. Despite a major recall and high energy and labor costs in Germany causing a 22% decline in BMW’s stock in 2024, the upgrade offered investors hope. Volkswagen, despite its ongoing labor dispute over cost-cutting measures, has its supporters. Essig has assigned a price target of €180 ($189) to Volkswagen, one of the highest among analysts tracking the company. He suggested that, despite the negative sentiment surrounding the company, it could be an excellent investment opportunity given its strong brand and potential for recovery.
However, the outlook for 2025 is not entirely free from challenges. The automotive industry faces numerous obstacles. This includes potential layoffs, rising competition, price pressures, and ongoing restructuring. efforts. Analysts, including Rella Suskin from Morningstar Inc., predict that it will be a highly competitive year, with automakers fighting for market share in an environment of limited growth. Additionally, the looming implementation of stringent European Union emission reduction regulations presents a significant challenge. The European Automobile Manufacturers’ Association has estimated that these regulations could result in up to €13 billion in fines for car manufacturers. Companies like Volkswagen and Porsche AG are expected to be most at risk from these potential penalties.
Many analysts believe the sector could find relief in 2025, despite these challenges. Fabio Hoelscher from MM Warburg & Co. noted that the automotive industry is accustomed to experiencing cycles of growth and decline. Given the current negative sentiment surrounding the sector, even a modest improvement could trigger a strong recovery. Hoelscher expects that the beginning of 2025 could see some much-needed relief for the sector, with investors becoming more optimistic as the market adjusts to the new realities and potential regulatory hurdles.
While the road ahead for European automakers remains filled with challenges, the current low valuations, the potential for Chinese stimulus benefits, and the prospect of sector consolidation all contribute to a sense of optimism in the market. Although 2025 is likely to be a tough year with ongoing structural issues, the possibility of a turnaround is real, especially if the market begins to look beyond the short-term hurdles and focuses on the long-term potential for recovery and growth.
