Morgan Stanley Says To Sell Auto Cycle Rallies, Fails To Locate Value

Morgan Stanley recommended selling any rally in the auto sector. The firm noted that there is very limited investor appetite for the European or the U.S. auto stocks. The firm believes investors would want to sell any rally triggered by central bank and fiscal support.

Cyclical Risk

Analysts Harald Hendrikse and Victoria Greer sees cyclical and structural technology risk even as European automakers remain confident due to recovering sales in Europe, the resilience of China, limited U.S. exposure and ultra cheap finance. However, according to the analysts, "value is not enough."

Technology Risk

Morgan Stanley believes the conversion of the European OEMs to electric drive creates significant uncertainty. The firm raised several questions, including the cost of developing new powertrains, the price consumers will pay for the proposed EV drive vehicles versus combustion engines, the ability of EVs generating similar margins to existing cars, among others.

Rally-Less Likely

Morgan Stanley highlighted the underperformance of auto stocks in the year-to-date period due to the investors pricing in peak cycle earnings and de-rate, especially the OEMs into the 2017 estimates. The firm sees less scope for a rally on low valuation in the October/November timeframe, given the uncertainty surrounding the central bank decisions, European bank performance, the U.S. election and European risks such as the Italian referendum.