A warning that landed with a thud, then a shrug
Volkswagen slashed its profit forecast on Friday and said it sees its operating margin to top out at 1%. An analyst downgrade followed, peers sold off briefly, and then the sector rallied on Monday.
Goldman Sachs's Christian Frenes called the update "material in optics but limited in incremental information content," adding VW "is largely aligning its assumptions with market realities that have been evident for some time."
Investors have warmed to VW's overhaul plan. "The market says: if you can fix VW, you can fix other OEMs, too," said Daniel Schwarz at Bankhaus Metzler. Sentiment toward Volkswagen has been buoyed by a restructuring pact involving management, labor representatives, the state of Lower Saxony and the Porsche-Piech family.
Cheap stocks, soft demand, and big dispersion
Autos have dropped 16% this year as European brands grapple with low-priced Chinese competitors domestically and soft spending in China, historically important for Mercedes-Benz and BMW. Even so, since the end of June the group has risen 3.2%, while the broader market has gone nowhere, as investors priced in potential protectionist measures and large-scale cost cutting.
Valuation-wise, carmakers are still the bargain bin of Europe, trading around 8.6 times projected earnings versus roughly 15 for the market overall. Still, on both absolute and relative bases, those multiples sit above long-run norms. Under the hood, results vary wildly: Stellantis has lost over 50% of its market value this year, marking a third straight annual slide as investors doubt its plan to revive Jeep's U.S. business.
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Policy watch: Europe's deadline, China's push, and a possible reset
An October EU timetable to address trade frictions with China has investors expecting Europe to try to curb the flow of low-priced Chinese cars. European officials have attributed a record trade gap to overcapacity and unfair practices by China, accusations Beijing rejects.
RBC's Tom Narayan argues that if Chinese automakers are required to buy from Western suppliers and meet the full set of European rules, their cost edge could "diminish materially," limiting market-share losses for Europe's brands "to just a few percentage points."
Not everyone is convinced. UBS's Patrick Hummel said the tangible upside from any rule changes looks limited and cautioned that China could retaliate, a risk that would hit German premium players hardest. Meanwhile, improving domestic signals could help: Germany's business outlook strengthened for a fourth straight month in August and is expected to expand again this week.
Positioning and what it means for your money
Autos remain unloved, but less so than before. In Bank of America's September fund manager survey, the group ranked as the second most underweight after retail, an upgrade from dead last in July and August. Even so, earnings projections are still drifting lower. Goldman's Sharon Bell said she would stay underweight autos.
There are some green shoots: This month, Porsche increased its automotive net cash flow margin following the sale of a holding in the entity that controls Bugatti, a reminder that portfolio moves and cost cuts can still move the needle. For regular investors, the setup is a tug-of-war between low valuations and potential policy support on one side, and soft demand plus China risk on the other.
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