European Auto Stocks Unlikely to Benefit from Central Bank Rate Cuts, Morgan Stanley Warns
In a recent note to clients, Morgan Stanley has highlighted that European auto stocks may not see an immediate boost despite central bank interest rate cuts. While hopes were high for increased affordability in new vehicles, historical data shows that the sector does not react quickly to rate cuts.
The analysts at Morgan Stanley emphasized that lower rates alone cannot save the auto sector. While reduced rates may improve car affordability, underlying demand issues may take several quarters to resolve. Weak demand and deflation in car prices, both new and used, could prolong the sector's recovery.
Morgan Stanley's macro team predicts that the Federal Reserve will implement a 25-basis-point rate cut at the September FOMC meeting, with three more cuts expected by the end of the year. However, the analysts caution that cheaper money may not be enough to offset the pressures in the auto sector.
Lower rates are likely to coincide with decreased average selling prices as OEMs strive to defend their market share. While this may help affordability, it could create a challenging margin environment for manufacturers.
The report also highlights that falling bond yields may not benefit credit-sensitive stocks like OEMs as much as expected. Lower bond yields, while helpful for affordability, could indicate lower aggregate demand and not necessarily tighter spreads.
Additionally, Morgan Stanley's data shows that European car stocks tend to underperform when bond yields drop rapidly. This suggests that rising bond yields historically have been more supportive for the sector.
Overall, the analysts suggest that the risk-reward profile for investors with a multi-year horizon remains poor in the auto sector. Margin downgrades, weak demand environment, and high margin estimates continue to pose risks for European carmakers.
Despite the challenges, Morgan Stanley's analysis also points out the role of inflation in the auto sector. Rising prices had previously benefited the industry, but recent data indicates a deteriorating fundamental backdrop for automotive pricing.
In conclusion, investors should be cautious when considering investments in European auto stocks, as the sector faces several challenges that may impact profitability and performance in the near future.