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Goldman Sachs Reckons Dire Europe Projections Overdone

Global Acceleration Set For 2012 With Promise Of Fat Margins
But Others Battening Down The Hatches For Hard Times

Most investors are circling the wagons to protect themselves from the gathering storm in European auto markets, but investment bank Goldman Sachs and forecaster J.D.Power beg to differ.

Goldman analyst Stefan Burgstaller believes that most of his colleagues are much too pessimistic about Western Europe’s prospects, and he is also getting excited about the longer term on the global scene.

“We continue to forecast a European passenger car and light commercial vehicle market decline of only seven per cent in 2010, compared to a consensus expectation of a 10 per cent decline,” Burgstaller said. He pointed out that Fiat CEO Sergio Marchionne expects a 16 per cent fall.

J.D.Power expects a 5.9 per cent decline in 2010 in Western Europe, and it has recently revised upwards its annual rate forecast.

“This relative instability cannot be expected to last, as the currently weak markets of Germany and Italy are joined in post-incentive weakness by the U.K., probably as soon as (this month), and Spain. Yet the stronger recent performance in some core markets and a remarkable rebound in Scandinavian markets, have led to a further upgrade to our 2010 forecast,” said J.D.Power analyst Pete Kelly.

German sales, down 35.1 per cent in May, is being held up by underlying demand as government subsidies expired, “and largesse of vehicle manufacturers seeking to protect volume through discounts,” Kelly said.

Things look much worse to Citigroup Global Markets analyst John Lawson, who is closer to Marchionne-like gloom.

“On average, therefore, the contraction in the balance of the year should approximate 15 per cent if the market plausibly settles at current selling rates. This prospect is much discussed, and will not take company management or investors by surprise, but our sense is that despite this foresight, share prices of volume assemblers impacted will struggle to perform until the true scale and competitive impact to the slowdown is more apparent,” Lawson said.

Worse is yet to come
Bank of America Merrill Lynch also believes that worse is yet to come.

“We believe that austerity will have a much more detrimental impact on future car sales than the market currently believes,” Merrill Lynch said in a report.

J.P.Morgan analyst Himanshu Patel is also concerned about the possible impact of European government spending retrenchment, led by Germany.

“We still believe tightening fiscal policy in Europe will lead to reduced economic growth, which suggest more downside than upside to our 2011 production and earnings estimates, though the near-term strength in production conferred by suppliers may ironically create upside surprises to 2010 estimates or at least those in the second quarter,” Patel said.

Goldman Sachs’ Burgstaller concedes that worries about the future of the euro, nervousness about a slowdown in China, and negative imminent headline sales figures in Europe will unnerve investors in the short-term. But all will be well if they grit their teeth and hang on.

“The global automotive sector could experience a perfect storm in 2012, as developed markets gain momentum and emerging markets continue to grow strongly. On average, we forecast global car sales will grow 7.7 per cent through to 2012, improving price/mix from 2009 lows and lower break-even points may also help take margins to a new peak,” Burgstaller said.


Neil Winton – June 14, 2010

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