"Accordion Effect" for Automotive Suppliers
Automotive cycle: The automotive sector has headed in an upwards direction for ten years. Until 2018, worldwide auto sales were up 40% from pre-crisis levels. The largest part of the increase came from China, which had become by far the largest automobile market. It therefore came as a shock when the growth of Chinese car sales suddenly turned into a double-digit decline in September 2018 (see Diagram). At the same time, sales also declined sharply in Europe, partly as a result of the modified test cycle for new vehicle types (Worldwide Harmonized Light Vehicles Test Procedure - WLTP).
‘Accordion-Effect’ for the suppliers: This is not the first time that the automotive industry was unprepared and hit by a change in direction of sales. The number of unsold cars has already risen by the time the lower sales figures become available. To prevent inventories from rising further manufacturers are slowing down production and throttling orders even more. The systems providers are doing the same thing as their suppliers, which increases their backward volatility. It is quite possible that manufacturers of components such as semiconductors will temporarily not receive any delivery requests from individual customers. How strong this effect is and how long it lasts is hard to estimate. This explains the hefty valuation corrections. What is certain, however, is that the inventory effect also has a positive impact as sales stabilize.
What’s next? In the fourth quarter, and in anticipation of a flattening decline in sales, we increased those positions of automotive suppliers in which we have the greatest confidence. After a subdued initial quarter in 2019, these companies enjoyed a strong recovery in April. The trigger was that a "worst case scenario" like in 2009 did not occur. We reduced the weight of automotive suppliers in the portfolio throughout the month but will continue to invest in the sector. We want to engage more in the railway sector, which is less driven by short-term sales and benefits from structural growth.
Did you know? White truffles were found for the first time north of the alps in the city park of Geneva – thanks to climate change! (Source: www.srf.ch)
This is an excerpt from Carnot Capital's commentary published on the 3rd of May 2019, of which the full version can be accessed here.