Global auto OEM price performance update

by SR on May 7, 2012

Guangzhou Auto takes a pasting, other Chinese OEMs outperform

I have updated the share price performance figures for the 30 or so auto OEM stocks that I track. The charts show relative performance over the past year; since the Japanese market bottomed in November 2011 (forgive my parochialism); year-to-date since the beginning of calendar 2012; over the past three months; since the start of the current month.

The image below covers just the one week since the last update and is thus too short-term to be of use for all but the most rabid momentum players. I present it here as a example of something that surprises many institutional investors when they see these charts, which is the potential for huge divergence in intra-sector performance. My clients are not stupid: they understand and are keenly aware of how various themes work to partition stocks within the sector, how sentiment ebbs and flows. On the other hand, few of them seem to have really sat down and looked hard at performance on a relative basis across the globe.

I think the reason that more investors don’t do this is the combined problem of tools and time. I don’t think most of my clients have the tools, because generating this stuff is more difficult and far messier than it might look to you. I don’t think most of my clients have the time, because they cover multiple sectors and seldom have the luxury of being able to focus on just one. Once you see it all laid out in living colour it’s amazing how much variation there really is; the gap in performance jumps out at you.

Global OEM share price performance over the previous week (native currency base)

Substantial short-term divergence in share price performance

The graphic above covers just the last week since my last update and yet we can still see some big moves. For example, assume that you were an Asian investor who had decided that the bad news was now all in the price on Guangzhou Auto Co. (which would have been a bad idea – the company announced some unimpressive results on 29 April) and that the Brilliance-BMW-in-China story was also now fully discounted. Assume moreover that on the basis of that view you had taken a long position in GAC and shorted Brilliance (assuming you were able to get the borrow) then you would have lost 13% on that trade in a week. I acknowledge that it’s the extreme example from the past 7 days, but I have seen similar spreads develop many times over the past few years. And as you draw this performance out over longer intervals, the numbers just get bigger.

Sure, at some point mean reversion will probably kick in, but even taking a 12-month view there is ample potential for trouble because that level of divergence can persist for many quarters. And it is not confined to one or two outliers at either end of the pack. All of the top 7 stocks in the group of 32 (roughly, the top quartile) that we are discussing posted an increase of 12% or more over the past year. All of the bottom 7 stocks (roughly, the bottom quartile) posted declines of more than 25%. Maybe if you can take a view over 2-3 years you can avoid the worst effects of the share price noise but I don’t see many clients with that kind of mandate these days. We’re all traders now.

Stock pickers only please

So what’s my point? I have no magic bullet, but I suppose by underlining the potential for substantial variations in performance I am making the argument that this is a stock picker’s sector. It is not the kind of sector where you can invest in the stock of a company with solid management and assume it will perform OK while you get on with something more “interesting”, like SPE or social networking plays. Autos and auto parts stocks are plenty volatile, even if their earnings are less volatile than those of tech stocks. Daimler is down 23% over the past year. Great Wall is up 28%. Are their long term prospects really different enough to warrant that? Maybe not, but the performance is what it is.

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