Japanese auto stocks appear reasonably valued, but the sector remains under pressure from a weakenin...
Japanese auto stocks appear reasonably valued, but the sector remains under pressure from a weakening dollar and the threat of a US-led consumer slowdown.
Auto stocks have underperformed the market over the calendar year to 27 May, returning an 8.7% loss compared to a decline of 3.4% in the Topix Index in yen terms.
The sector has rallied in recent weeks after the latest industry sales figures revealed 16.4 million units were sold in April, the highest number this year and well above the 14-15 million trend sales figure.
John Hatherly, head of research at M&G Investments, says slow growth in US sales and the weakening of the dollar versus the yen have been the major causes of underperformance across the auto sector. While many companies have been increasing production and their market share, commensurate growth in profitability has been lagging due to the increasingly competitive financing and after-sales markets.
'Autos are very heavily export-oriented, but increasingly companies are shifting production overseas to lessen the impact of currency, especially the yen's appreciation against the dollar,' Hatherly notes.
'The valuations of auto companies are not very high because there is uncertainty about the market,' Hatherly adds.
Stephen Hall, Japanese investment manager at Britannic Asset Management, agrees concerns persist, particularly at the macro level, but he is adding to a number of positions in autos on a stock-specific basis.
Mazda is his favourite stockpick in the sector and his largest overweight in the fund and Hall has lifted his overall exposure to the sector from underweight to neutral in the past fortnight.
'Mazda's business is much more euro-based than dollar-based and sales of the new Mazda V6 have been very good in Japan and Europe, although slower in the US. Mazda is also launching the RX8, a sports car this year. It looks great and should be very profitable,' Hall notes.
He adds Mazda is trading on a P/E ratio of seven times, compared to a sector average of 10 times and its greater dependence on the Asian and European markets cushions it from the US slowdown and dollar movements to an extent.
Hatherly says Toyota and Honda's greater reliance on the US markets for their sales has been behind much of their underperformance over the calendar year to 27 May. Over that period, Toyota has fallen by over 17%, while Mazda has posted a gain of 6.4% in local currency terms.
Besides dollar concerns, Toyota's share price has also come under pressure from pension funds selling out of equities and banks unwinding their cross-holdings, adds Hall. The group's financial services arm has also been under pressure in recent months and although he has some exposure to the stock, given its size in the Topix, it is an underweight position.
He is also underweight Suzuki and Mitsubishi. On the back of record profits, Suzuki is pretty much fully valued, Hall says. Projections for the coming year indicate strong growth in its motor cycle business in Asia, but flat car sales growth. Mitsubishi also offers little upside after pushing back a couple of years its goal of reaching a 4.5% operating profit.
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Firms outsourcing to local markets.
Dolar weakness hitting export values.
Japanese autos fully valued after bounce.
Financing arrangements stripping profitability.
£300bn of liabilities
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