US auto stocks are out of favour despite what might be expected to be a beneficial macro-economic pi...
US auto stocks are out of favour despite what might be expected to be a beneficial macro-economic picture of strong car sales and continuing consumer confidence.
Auto stocks are tending to be underweighted or ignored by US fund managers in the belief that the flow of news in the sector is not going to get any better despite strong sales figures of around 18 million vehicles this year. There are also concerns that US car firms are being put under pricing and margin pressure by consumers shopping around on the internet for the best auto deals.
This is being reflected in the share price performance of the sector compared with strongly performing areas such as telecoms and technology. The S&P Automobiles index is up 9.69% in dollar terms in the 12 months to 6 December compared with a rise of 64.03% in the S&P Computer Software index in the same time period. This also compares with a 118.76% rise in the S&P Communication Equipment index in the same time period and a 20.25% rise in the S&P 500.
James McLellan, US fund manager at Clerical Medical, sold out of Ford in the autumn in the belief that the news flow for the company was not going to improve. Ford has seen its share price fall by 6% in the 12 months to 6 December.
McLellan says: "We do not have any auto exposure at all and it is not a huge part of the index. There is a feeling that we have had as good a time as we can hope for in these stocks. Despite strong auto sales the sector has not had any momentum. Also, Chrysler has effectively been taken out of the market now after its acquisition by Daimler Benz, reducing the size of the sector. People have been a bit more wary of investing in the sector as it is now fairly small."
He adds it is now easier for a fund manager to have a zero weighting in the sector because it would take a large move in one of auto stock to impact on the relative performance of a fund without any exposure here. For example, General Motors, the world's biggest car manufacturer, makes up only 0.428% of the S&P 500 index compared with 2.195% for Intel. Intel has seen its share price rise by 25.01% in the 12-month period between 9 December 1998 and 8 December 1999.
Richard Killingbeck, director of the international desk at Singer & Friedlander, says the group also has a zero weighting in US auto stocks. He says: "It is interesting to see the dichotomy of consumer confidence continuing to be on the upside in the US while the consumer-related stocks are under pressure.
"The simple explanation for this is that these type of companies cannot do anything about pricing power. Consumer confidence is high, auto sales are strong but the auto companies are suffering price erosion. If you look at the US market as a whole, there are two sectors driving performance, telecoms and technology."
Killingbeck adds that auto companies are not benefiting from the internet because consumer use of the medium is encouraging people to shop around, which means manufacturers need to avoid price rises in order to remain competitive. Killingbeck comments that a longer term theme to look out for is auto companies making increasing use of the internet to buy components, which will contribute to the downward pressure on costs.
Killingbeck also believes that General Motors' share price has seen a rise recently on speculation that it may be a takeover target or could sell off its 68% stake in satellite TV operator Hughes Electronics. General Motors has seen its share price rise by 36.75% in dollar terms in the 12 months to 6 December.
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