German Car Stocks Undermined By China Devaluation Again.
“Logically, more (currency) depreciation should follow; economic growth is slowing, capital is fleeing and the currency was already overvalued”
German car stocks took a beating for a second consecutive day as China again manoeuvred its currency lower on foreign exchange markets.
There was plenty of doom and gloom from analysts about the implications for BMW, VW and Mercedes, but some held on to the view that because China’s currency move was small, their profits were still set fair. The next phase of China’s economy growth however might be more ominous for the Germans and traditional manufacturers because it means local car companies might start to flex their muscles.
Volkswagen, which with its luxury subsidiaries Audi and Porsche, makes big money in China, lost just under four percent of its value Wednesday for the second day in succession. BMW and Mercedes parent Daimler both lost close to three per cent, slightly less than yesterday’s negative numbers.
The Financial Times’ “Lex” opinion column said companies and investors should get used to this volatility.
“There will be more of it,” Lex said.
“Logically, more (currency) depreciation should follow; economic growth is slowing, capital is fleeing and the currency was already overvalued,” Lex said.
“It (devaluation) is deemed bad for U.S., European and Japanese companies selling into China – partly because it may crimp sales and profits in their home currencies – but more because of what resorting to devaluation says about the state of the Chinese economy. No wonder shares in the likes of Burberry and BMW fell on Tuesday,” Lex said.
Joining in the negative reaction was this expert, quoted by Reuters.
“We had a decent run-up but this is all unwinding pretty quickly. A competitive devaluation of currencies is never good,” Mirabaud Securities European equity sales executive Rupert Baker, said.
Sky not falling
“I’d be avoiding areas such as carmakers and luxury goods companies,” he said.
Not everybody thinks the sky is falling.
Yesterday, investment researcher Evercore ISI pointed out that the devaluation was small, and that the Germans had hedged their foreign exchange positions to make sure their profits in 2015 and 2016 would be protected. Evercore ISI analyst George Galliers stood by his guns today.
“Our position remains the same – the currency moved another 1.6 per cent and the Germans obviously remain almost 100 per cent hedged for 2015 so there’s no impact there. The impact for 2016 still remains fairly minimal. But if we end up in a situation where the China currency dropped another five or 10 per cent then things start to get interesting,” he said.
“At this point we don’t see this as a major problem. But this level of uncertainty that now is surrounding the exchange rate, it’s not surprising that investors are becoming increasingly nervous and we can understand why they are looking to reduce exposure,” Galliers said in an interview.
Much produced locally
Professor Ferdinand Dudenhoeffer, director of the Center for Automotive Research (CAR) at the University of Duisburg-Essen, put a positive sheen on the prospects for the German premium car makers, pointing out that they now produce a huge amount of vehicles in China, which would be less vulnerable to currency movements.
Dudenhoeffer was more worried about the weakening car market there.
“What happens to the China car market is much more important than the exchange rate. We’ve seen the slowdown taking place each month, but it’s difficult to evaluate how long this will continue,” Dudenhoeffer said in an interview.
New car sales in China, now the world’s biggest car market, fell 2.5 percent in July to 1.3 million units, according to the China Passenger Car Association, the lowest monthly sales since February 2014.
“When will the new growth period start,” asked Dudenhoeffer. “When the economy stabilizes and we have new growth, then the car market will be very sound. If that doesn’t happen, then we have a situation that is a bit tricky.”
Dudenhoeffer said that when the recovery does start it might be more difficult for BMW, Audi and Porsche to restore the good times because sales to the new wealthy in China’s big cities will reach saturation and slow down. This also represents an ominous opportunity for local manufacturers to gain ground.
“There will be demand in the rural areas – after all one billion people live there. Incomes are very low outside the cities at the moment, but steadily improving. This all depends on the speed of economic growth and because of lower incomes in the countryside, they will buy cheaper cars. In the next period of growth this will be a real chance for Chinese car makers to become strong,” Dudenhoeffer said.