Thursday 10, August 2017 by William Mullally

Investors talk about the auto sector

Christoph Riniker, Head Equity Strategy Research, Julius Baer

In recent weeks, the auto sector has been on everyone’s lips. Although the results of the current earnings season are mainly surprising on the positive side, investors seem to be focused instead on keywords such as ‘diesel scandal’ or ‘cartel’. As a consequence, the sector has continued to underperform on a relative basis, despite low valuation levels.

The problems for the sector started roughly two years ago with the first diesel scandal at Volkswagen. More negative news came out recently, according to which the three big German carmakers VW, BMW and Daimler have been part of a cartel since the early 1990s.

While material repercussions will remain an unknown factor for quite some time, it can safely be assumed that mistrust in the car industry will remain high going forward. The outcome of last week’s Diesel Forum in Berlin will not change that. There might be short-term relief for the industry, but major problems continue unresolved. Companies have to adapt to the fact that various countries want to introduce emission-free mobility sooner or later.

Norway, for example, wants to implement this by 2025, India by 2030 and both France and the UK by 2040. Consequently, major changes will take place, putting pressure on the industry. Perhaps as a result of all this, investors expect earnings momentum to come down substantially in 2018.