For those fund managers worried about further falls in new economy stocks, the auto sector is lookin...
For those fund managers worried about further falls in new economy stocks, the auto sector is looking cheap with little downside risk.
Both Britannic and Investec Guinness Flight are buying into car manufacturers for this reason, although the two groups admit there is limited upside to go for.
Philip Whittome, head of the Japan desk at Investec, has a 10.3% holding in Japan's auto and autoparts sector against a market weighting of 8.3%.
Natasha Chetwynd, fund manager at Britannic, has come out of technology due to its high valuations and now has holdings in auto stocks such as Honda, Suzuki, Fuji Heavy Industries and Mazda. Honda has hardly been a strong performer with operating losses of ¥14.5bn for the year ending in March.
One stock she does not hold is Nissan, in which Renault has a minority stake. While the car giant is predicting operating profits to jump by one third to ¥110bn in the year to March 2001, Chetwynd believes this is too optimistic. The share price is expensive and the business is in need of restructuring over the next two to three years, she says.
One possible positive for the industry is the growing degree of overseas ownership and influence in the car companies. In addition to Renault's stake in Nissan, Ford has a holding in Mazda. Chetwynd says: "Ford and Mazda will be sharing their platforms so any of Ford's spare capacity and parts can be used by Mazda's Japanese production lines and vice versa."
There are two distinct markets for Japanese car firms. The likes of Honda, Toyota and Nissan control around 27% of the US automobile industry but with the yen rising against the dollar and the North American economy possibly coming to the end of a period of expansion, the outlook is dim.
Honda's Accord range of vehicles has been the best selling passenger car in the US for a number of years. Its dependence on the US market is a growing concern despite having a P/E ratio of 16 compared to Toyota's 47, according to Whittome, who holds no shares in Honda.
In contrast, the domestic car market appears to be picking up. Whittome sees it increasing at a reasonable rate with passenger car registration up 3% year-on-year in March. Even so he points out that Japan is still a net exporter of cars and will continue to suffer from currency issues in overseas market.
Chetwynd says: "Toyota is much more dependent on the domestic Japanese market. It has been performing well and the market looks strong but the company's valuation is already high."
Within the auto sector both managers prefer smaller companies with niche markets, such as Mazda, which has been restructuring its manufacturing capacity. Another favourite is Fuji Heavy Industries, which benefits from subsidiary Subaru's strength in the 4-wheel-drive sector of the automobile market. Suzuki, meanwhile, has a leading market share in mini vehicles.
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