Auto stocks are out of favour with US investment managers in the belief that the sector is likely to...
Auto stocks are out of favour with US investment managers in the belief that the sector is likely to be hit by the slowdown in the US economy.
The sector has seen record sales of 17.5 million automobiles over the last year but Edinburgh Fund Managers and Henderson do not believe that this rate of sale is sustainable. Auto stocks have also been underperforming the main US market over the past 12 months. The S&P Automobiles index is down by 18.7% in dollar terms over the 12 months to 3 July compared with a rise of 5.85% in the S&P 500 over the same time period.
Johnny Russell, US fund manager at Edinburgh Fund Managers, says: "I think a lot of the market has been anticipating that the business cycle for automobile companies might be tailing off.
"When you look at the three main operators, Ford, Daimler Chrysler and General Motors, they are not expecting future sales to be as high as they have been. Ford has been doing quite well in terms of sales in North America while General Motors has been losing market share in North America.
"The other players that have been coming into the market, such as the automobile firms from South East Asia have been increasing market share and have been putting pressure on the US incumbents. We also have an interest rate environment which is a bit negative for these stocks as they have been rising."
Russell adds that increasing disposable income and a low unemployment rate has helped to boost automobile sales, although the market is now expecting a down-turn.
Henderson has no investments in the US auto sector as it is not confident about its earnings prospects.
Tim Day, divisional director, US equity group at Henderson, says: "The first thing is that the industry is coming off a record year and it is going to be very difficult to do better.
"In some areas, sales are beginning to moderate particularly for the utility vehicles because of gasoline price rises. The backdrop is not a good one for these stocks. We have had earnings warnings from companies such as Goodyear. I would not be surprised to see a number of other related companies missing earnings expectations in the near term.
"We do not feel disposed towards the automobile sector. The valuations look cheap but there is a lot of earnings risk. I do not see a catalyst in the short to medium term to go back into the sector."
Edinburgh Fund Managers does hold General Motors on the back of its low valuation and also its diversified business exposure. General Motors is on a P/E of 6.64 times and has seen its shares fall by 13.19% in dollar terms over the 12 months to 3 July. As well as its automobile manufacturing business, General Motors owns satellite company GM Hughes and also has exposure to areas such as allowing people to access the internet while in their car.
Russell says that a catalyst for investing in the sector could be if the US interest rate cycle reaches its peak but adds that the US is not yet at this point.
Day says that if he were to invest in the sector his stock of choice would be Ford.
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