European Autos Rally May Be Running Out of Gas as Risks Loom

Updated on
  • SXAP is the only gainer on Stoxx Europe 600 index this year
  • Kepler says short-term caution needed after stock advances

European autos, the only industry group still rising on the Stoxx Europe 600 index this year, may have a hard time sustaining its six-month rally.

The Stoxx Europe Automobiles & Parts index is up 2.1 percent in 2018 even after the recent market selloff, while the benchmark is down 3.8 percent. Takeover target GKN Plc is the biggest gainer in the autos group along with Fiat Chrysler Automobiles NV, which has impressed investors with spinoff plans, new trucks and solid results.

Auto stocks have been advancing “at full steam,” and the market is ignoring adverse developments such as the stronger euro and higher interest rates, Kepler Cheuvreux wrote in a note on Monday. Optimism about the global economy has probably peaked, and the autos rally looks “partly exhausted,” analysts Thomas Besson and Michael Raab wrote.

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They’re not the only skeptics. Morgan Stanley said in a note on Monday that premium car sales are slowing in Europe because of diesel fuel aversion, U.K. market softness and higher interest rates. The sector’s valuation remains low, but German carmaker consensus earnings estimates may be too high, wrote analysts including Harald Hendrikse and Victoria Greer.

“We believe that in a more risk-averse environment, concerns regarding the autos may return,” they wrote.

Evercore ISI on Jan. 25 wrote that after an “impressive” stock rally, carmakers and parts producers are facing risks including higher raw material costs and foreign-exchange headwinds.

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