European car share relief set to slide

Summary

Thursday’s relief rally in European auto shares will hit the skids as the wider trade picture continues to drag.

Washington in the driving seat

The two dozen EU, U.S. and Asian automobile stocks we monitor have lost a total of $139bn so far in 2018. The sum underlines investor concerns that go far deeper than the direct impact of new tariffs. In turn, that order of value destruction also eyes Washington’s ‘changeable’ administration. Reports suggest the White House could suspend a threatened 20% tariff on EU car imports in exchange for concessions. However, the probability of further twists could be as high a 50%, judging by recent Presidential flip-flops.

Daimler hit hardest

In Europe, souring trade relations mean Daimler should continue to see the most share price pressure after lagging both DAX benchmark and European car and truck stocks this year. In dollar terms, Daimler has also lost the most market value on our watch list. Even after a 4% share price jump on Thursday, the Stuttgart group is worth $20bn less in 2018. That capital loss easily outstrips value that investors in China’s GAC and Great Wall Motors have seen go up in smoke, despite their shares sliding 40%-46% this year.

Daimler’s double duty

Some of Daimler’s hit is pegged on wider issues that pre-date tariff/trade angst, but which could now be exacerbated. These include forecast downgrades and a double whammy of new duties as Daimler imports both into China from the U.S. and into the U.S. from Europe. Additionally, rival exporters to China from Europe benefit from Beijing’s new 15% duty on more units than Daimler. It was cut from 25% in May. China subsequently raised tariffs on U.S. car imports to 40%. Just beforehand, Daimler slashed prices for U.S.-made Mercedes in China. As well, Daimler’s 5.5% net debt to core earnings ratio means higher leverage than BMW, VW, Fiat and Peugeot. A tax and financing cost disadvantage to arch-competitor VW extends Daimler’s discount.

Tariff brakes

Even if reported indications prevail though, the U.S.’s 25% hike on aluminium and steel duties will soon begin to dent all European carmakers. Furthermore, any escalation or persistence of trade headwinds keeps global manufacturers, including Europe’s car industry, in the frame.

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