Long-term Disruption Prospect Clouds Outlook For Europe

Long-term Disruption Prospect Clouds Outlook For Europe.

Current Relatively Healthy Conditions Not Enough For Pessimists.

“how bad can it get?” and “how much bad news is already priced in”

Western Europe’s car sales growth is slowing, but despite few forecasts pointing into negative territory, investors are worried about the future because new technology disruption means huge investment has to be found, while worries about the future of diesel and cartel collusion cloud the future.

According to LMC Automotive, although sales grew 2.4 per cent in July compared with the same period of 2016, the Western European selling rate fell sharply to a 15.4 million annual rate, with the pace of sales cooling off as the second half of the year began.

“This is perhaps unsurprising given a very robust first half of 2017, and the strength of the euro-zone gives reason to believe that the outlook for the region is still fundamentally positive,” LMC Auto said in a report.

Citi Research said investors are seeing a cup half empty, not half full.

“It’s a curious time for E.U. Autos. Earnings seem to be a secondary concern. If our observations are a fair indication of investor sentiment, we imagine auto execs are frustrated/demoralised at present. Our recent dialogue with autos investors has centred on the two sides of the one question “how bad can it get?” and “how much bad news is already priced in,” said Citi Research analyst Michael Tyndall.

Not sustainable

Tyndall said despite the healthy state of most manufacturers’ profits, they do face many threats which lead most investors to conclude this isn’t sustainable. The noise around FCA suggests turmoil while Daimler’s recent move to create separate legal entities for its car and truck business caused uncertainty.

“Many investors believe the auto industry is on the cusp/in the midst of significant disruption. This tends to fall into either powertrain evolution – the switch from internal combustion to electric – or shared ownership/mobility as a service made possible by autonomous vehicles.”

“The shift to EV causes the greatest level of angst given – a) the amount of upfront investment and b) the limited success of current EV offerings. We expect the forthcoming Frankfurt auto show in September will see a plethora of EV offerings as the established players try to generate consumer and media interest in a life beyond diesel,” Tyndall said.

He pointed to the worries also about litigation from European authorities because of loopholes in emissions regulations.

Any substance in speculation?

“Diesel investigations have moved on to potential fraud and false advertising. On top of this we have collusion concerns, although the fact that press stories conflict each other and BMW says it is not under investigation makes us wonder if this speculation has any substance. Irrespective, litigation is a cloud hanging over the sector and some investors have opted to stay away as a result,” Tyndall said.

Not everybody is so pessimistic.

Investment bank UBS increased it sales forecast increase for Western Europe to 3 per cent growth from 1 per cent.

“We believe the latest purchase incentive campaign by German (manufacturers) to trade in old diesel cars can boost new car sales, in particularly in Germany,” UBS analyst Patrick Hummel said.

And Professor Ferdinand Dudenhoeffer, director of the Center for Automotive Research (CAR) at the University of Duisburg-Essen said he expects this to generate an additional 100,000 sales in Germany this year.

Over the first half of 2017, E.U. sales grew 4.7 per cent to more than 8 million.

Modest increase
A month ago IHS Market said the overall European Union market was losing momentum, but retained a forecast of a modest increase in sales for the year of 1.5 per cent to 14.7 million.

The European Commission has said it expects euro area GDP growth of 1.7 per cent in 2017 and 1.8 per cent in 2018.