What is the most unloved sector in the global equity market?
First off, you might think of oil, which is beset by huge oversupply imbalances despite the recent bounce inspired in great part by bullish financial speculators. Possibly you might plump for banks, which are seeing their net interest margins scythed by increasingly desperate central bankers and zealous regulators fighting the last war.
However, surely the sector with some of the most woeful multiples in the broader equity universe is the autos. Yes, the autos which should be riding the crest of a wave of resurgence in sales in both the US and Europe. Car-makers are also the biggest beneficiaries of the pivot to the consumer and services sector in China. Add to that the technological revolution taking place, where up to 2bn inefficient internal combustion engines need to be replaced over the next decade, and things should be tickety-boo.
And yet take a look at the valuations on a price/earnings ratio for the sector, which is currently around seven times forward PE, and car manufacturers are giving the other two sectors a run for their money in the ugly stakes. And it’s not just Volkswagen, where investors are now wilfully looking for a bottom amid the worldwide damage-limitation exercise of the car-maker’s diesel debacle.
In fact, I had a look at Ford and Fiat Chrysler compared with VW and noticed the other two are actually trading lower than the German company’s woeful seven times PE. Now, given the S&P 500 is bordering on 18 times earnings, that is a seriously large cold shoulder for autos. But why?
Well, why not? When you look at the litany of issues, including recalls, low margins, high investment and marketing costs, over-capacity, weak financials, employee obligations including big pensions costs, and overall profitability in the wake of the financial crisis near-death experience, then it’s no surprise the sector has had a high degree of caution surrounding it.
Add in the fact that the Volkswagen and now Mitsubishi woes have led to scepticism regarding the whole industry’s grandiose claims on emissions and fuel efficiency and you wonder whether a whole new world of pain is about to beset all car-makers.
Not many of us have ever trusted the boasts over mileage per gallon (MPG) of gasoline. I’ve got two cars and the fantasy world that is Planet Lab Test requires lots of maths plus a huge pinch of salt to get back to real road driving.
More worrying, though, is the fact that, without even breaking any rules, most diesels – which are the mainstay of European manufactures’ sales – chuck out many times more unsavoury chemicals into the atmosphere than the aforementioned Planet Lab Test, according to the latest research. I am no eco-warrior but surely we should begin to start worrying about these big disparities given the parallel growing vilification of diesel by clean air campaigners.
Nobody expects the auto-makers to do anything about these betrayals of consumers without a big stick up their rear bumper, but maybe, just maybe, braver regulators in Europe and beyond will start to end their cosy compliance in the twin hoodwinking of car drivers over MPG and emissions in real world driving.
This of course will only happen when buyers start giving a damn about this more than they care about 0-60mph machismo and supposedly attractive purchase-financing terms.
A burst of irrational exuberance could soon give the autos their day in the sun as stock-pickers ignore all these negatives, but if the car companies are still on pitiful valuations now given the huge amount of inventory they are shifting globally, goodness knows what will happen if they ever land back on pot-holed terra firma.