Photographer: Yorgos Karahalis/Bloomberg

Europe Auto Stock Skid Hits 24% as Some Charts Beckon Bulls

Updated on

When it comes to Europe’s carmakers, most stock traders are hitting the brakes. Technical charts indicate it might soon be time to buy them again.

The group accelerated its slump in the past two weeks, and it’s now on track for its biggest monthly plunge in three years. Bearish sentiment has become so prevalent that the Stoxx 600 Automobiles & Parts Index has reached a point on price charts where analysts say rallies have materialized in the past.

If the gauge stabilizes around the current level, it’ll be a good time to invest in them, according to Commerzbank AG’s Sophia Wurm.

“The sector has some good support at a level we’ve just reached,” said Wurm, a technical analyst in Frankfurt. “I would expect the index to stay into this zone in the next weeks or months. That could be a good entry point.”

China’s currency devaluation and the rout in emerging markets increased concern that exporters would suffer, just as the euro, their main boost in the first quarter, stabilized. That dragged the Stoxx 600 auto gauge down 24 percent from its March record, the worst performance among European industries.

European carmakers have lost so much that they’re now the cheapest since 2012 relative to the broader market. They trade at 9.4 times estimated earnings, 41 percent lower than the Stoxx Europe 600 Index.

Last time the gauge of automakers crossed below the relative strength index level of 30 last October, it rallied 9.7 percent in the next month.

China Sales

Grim prospects in China have hit the industry. Consumers in the world’s biggest auto market bought the fewest cars in 17 months in July, and that was even before the yuan devaluation.

“European companies with sales in China will likely see a negative impact on earnings translated into home currencies,” Jon Cox, an analyst at Kepler Cheuvreux in Zurich, wrote in a note dated Aug. 12. “A generally favorable environment for internationally focused companies, based on solid emerging-market growth and stable currencies, is at an end.”

Volkswagen AG cut its annual sales forecast last month, and BMW AG said a slowdown in China may force it to revise its profitability goals.

Others, like Daimler AG, are holding up. It posted a record quarterly profit as an overhaul of its Mercedes’s lineup has helped prop up sales in China. PSA Peugeot Citroen managed to triple its earnings in the first half of the year, scaling back spending and selling more cars at higher prices.

Overall, analysts still see automakers among the leaders of profit growth this year. They project their earnings will rise 18 percent, compared with 6.1 percent for Stoxx 600 members.

“The headwind will fade and European automakers will be able to do well in China and Europe,” said Ion-Marc Valahu, co-founder and fund manager at Clairinvest in Geneva. He started adding auto-parts companies to his holdings and is getting ready to invest in carmakers. “If the markets in Europe and the States stabilize, it might make the case to come back to the beaten-down auto sector.”