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European Auto Stocks Plunge Amid Industry Woes: What Every Investor Needs to Know
By Danilo Masoni
MILAN (Multibagger) - European auto stocks experienced a significant decline of almost 4% on Monday, following alarming warnings from industry giants Stellantis (NYSE:), Volkswagen (ETR:), and Aston Martin. These warnings have reignited concerns about the sector's earnings outlook in a year already plagued by slowing demand and fierce competition from Chinese manufacturers.
The downturn resulted in a colossal $10 billion being erased from the market value of the STOXX Auto & Parts index. Stellantis, which is listed in Paris and Milan, saw its shares plummet by 14% after cutting forecasts and indicating that it would consume more cash than previously anticipated.
Stellantis, the fifth largest carmaker in Europe by market value and owner of brands like Chrysler, Jeep, Fiat, Citroen, and Peugeot (OTC:), attributed the downward revision to deteriorating industry conditions, increased costs associated with restructuring its U.S. operations, and mounting competition from Chinese electric vehicle (EV) manufacturers.
Citi analysts predict that the sector's weakness will persist in the coming weeks, with a recovery for Stellantis unlikely before 2025. This anticipated recovery is expected once the European-American carmaker resets its inventory, resulting in more favorable comparisons.
"We anticipate the current absolute and relative weakness to continue into October, before the annual Nov-Jan cyclical rally, which is likely to be supported by accelerating global rate cuts," said Harald Hendrikse, Citi analyst, in a note.
Analysts are forecasting a nearly 14% drop in earnings for 2024, a stark contrast to the post-pandemic years when supply chain disruptions enabled carmakers to increase prices.
Adding to the sector's woes, Germany's Volkswagen revealed on Friday that it has cut its annual outlook for the second time in less than three months. The company is also facing internal strife, with trade unions pushing back against unprecedented plans to shut down factories in Germany.
Aston Martin, meanwhile, warned of lower annual core profit on Monday and revised its production volumes downward due to supply chain disruptions and weakening demand in China.
By 0928 GMT, Volkswagen shares had dropped 2.6% in Frankfurt, while Aston Martin's shares in London plummeted by 20%. In Paris, Renault (EPA:) shares fell around 6%, while the broader market saw a modest decline of just 0.6%.
Despite a surge in Chinese stocks on Monday, buoyed by the latest economic stimulus measures from Beijing, these steps did little to lift sentiment towards European auto stocks.
Earlier this month, Mercedes-Benz (OTC:) and BMW (ETR:) both downgraded their forecasts, citing weakening demand in China, the world's largest car market.
The mounting concerns over falling earnings have put additional pressure on valuations, with the sector now trading at a near-record discount of 60% to the market, according to LSEG Datastream estimates.
Despite these rock-bottom valuations, autos remain the most underweighted sector among regional fund managers overseeing $284 billion in assets, according to a BofA survey conducted this month.
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Breaking Down the Impact: Why This Matters to You
- Stock Market Impact: The sharp decline in European auto stocks has led to a significant loss in market value, which could affect your investment portfolio if you have holdings in these companies or related sectors.
- Economic Indicators: The warnings from major carmakers like Stellantis, Volkswagen, and Aston Martin signal broader economic issues such as slowing demand and supply chain disruptions, which may impact other industries and economic health.
- Investment Strategy: Understanding the sector's current challenges and future outlook can help you make more informed decisions about where to allocate your investments. With Citi predicting continued weakness and a delayed recovery, it might be wise to approach auto stocks with caution.
- Global Competition: The increasing competition from Chinese EV manufacturers highlights the shifting dynamics in the global auto industry. Keeping an eye on how European carmakers adapt to this competition can provide insights into future market trends and investment opportunities.
By comprehending these key points, even the most inexperienced investor can grasp the significance of these developments and their potential impact on personal finances and broader economic trends.