ECB Liquidity Move May Boost Sales At Expense Of Future Ones.
Is Geneva’s Mood Boost Fizzling Out Already?
“QE, negative interest rates, don’t create demand, they bring it forward”
The euphoria following the Geneva Car Show didn’t last long, and some investors are insisting that short term gains in European car sales are simply being brought forward for a long-term neutral impact at best.
According to Morgan Stanley, the European Central Bank’s (ECB) second boost to liquidity by Quantitative Easing (QE2) will indeed spur demand for cars to the tune of 200,000 vehicles in 2016. Unfortunately, it has removed even more from its sales projections for 2018 and 2019.
“QE and negative interest rates don’t create demand, they bring it forward,” said Morgan Stanley analyst Harald Hendrikse.
Last year car sales in Western Europe leapt nine per cent to 13.2 million, but industry leaders were quick to play down prospects for 2016, with consensus forecasts centring at around three per cent.
Investors, some inspired by Geneva’s glitz and glamour, suddenly raised forecasts towards five per cent for 2016. IHS Automotive though held to its low forecast of a 1.5 per cent increase to 13.4 million.
Unsupported sales spurt
Hendrikse said last year’s sales spurt, the highest growth rate for 35 years, was almost completely unsupported by fundamentals such as employment or wage growth.
“QE (then) worked as planned with European households taking on even more debt as banks were free to lend more. We see more of this from the ECB’s latest offering, and we upgrade our European sales forecast by 200,000 to 13.7 million (against a peak of 14.8 million),” he said.
“However, we remove all of this extra demand from our (2018 and 2019) forecasts to allow for the fact that the ECB actions do not create demand, they simply pull it forward from the future,” Hendrikse said.
Barclays Equity Research, one of the cheerleaders for the positive mood after Geneva, said it was aware of investor caution because economic trends were weakening, and auto earnings peaking. They were also worried that auto demand had been inflated by rising leasing and lax credit.
“The majority view seems to be that consensus earnings are overly optimistic and that sector (stock) valuations therefore don’t look so attractive,” it said in report.
Nevertheless, Barclays stood by its forecast for sales.
“We are optimistic on the European demand outlook (after) we upgraded our forecast post-Geneva to five per cent (growth),” it said.
Morgan Stanley, continuing its gloomy theme, said profit expectations might be too high.
“We cannot see a fundamental driver for any improvement in earnings outlook from here, ……. and it seems unlikely that European car sales accelerate again. The best case seems to be deferred downside risk,” Barclays said.