The European automotive sector is going through a challenging period. Troubling developments have put pressure on the stock prices of European car manufacturers, leading to a decline in their significance within the global equity market. This comes at a time when the weighting of the global automotive industry in the worldwide stock index is at its highest level in over two decades.
This trend is primarily driven by the explosive rise in the market capitalization of the American company Tesla and, to a lesser extent, the emergence of Chinese electric vehicle manufacturers.
The European automotive industry is struggling. Several manufacturers have issued profit warnings this year, in some cases multiple times. These include major European players such as BMW, Mercedes-Benz, Stellantis, and Volkswagen.
Volkswagen recently announced plans to close three of its production sites in Germany to cut costs, prompting strikes among its workforce. Stellantis is also considering closing plants in Europe or relocating them to countries with lower labour costs. High production costs in Europe are one of the challenges faced by these companies, alongside the substantial investments required for the development of electric vehicles.
In recent years, European carmakers have made significant efforts to transition from petrol and diesel vehicles to electric ones. This shift is essential given the European Commission’s mandate that new vehicles must produce zero CO2 emissions by 2035. However, they appear to have initially lagged behind. Tesla, in particular, has rapidly captured a substantial share of the European market.
More recently, Chinese manufacturers have posed a new threat to European automakers with vehicles that feature superior technology and lower price points. At the same time, there has been a slowdown in electric vehicle sales, adding further pressure on European companies.
Impact on financial markets
These developments have had a noticeable impact on financial markets. For years, automakers accounted for 1.5 to 2 percent of the global equity market, as measured by the Morningstar Global TME Index. Japanese manufacturers traditionally represented around 50 to 60 percent of the industry’s market capitalization, while the weighting of European companies hovered around 30 percent. However, Japan’s share has now dropped to just under 20 percent, while European automakers account for only 13 percent.
In contrast, the U.S. share has risen to 50 percent, driven almost entirely by Tesla. Meanwhile, Asia represents 14 percent, with Chinese brands gaining ground. Tesla’s soaring market capitalization has also caused the weighting of automakers in the global stock index to consistently exceed 2 percent since late 2020, a rarity over the past two decades.
Stewart Investors Worldwide Leaders
Morningstar’s fund analysts identify prominent strategies that feature solid management teams and robust investment processes, or that are algorithmically assessed as strong based on the same framework. In this edition, we highlight a fund that meets all these criteria and has relatively high exposure to automakers. The Stewart Investors Worldwide Leaders fund earns an Above Average rating on the People Pillar and a High rating on the Process Pillar from Morningstar analysts, culminating in a Silver Medalist Rating.
The fund is managed by an experienced and well-regarded team at Stewart Investors. The current lead manager is Nick Edgerton, who joined the firm in 2012 and became co-manager alongside the highly experienced David Gait. In July 2016, Edgerton took over as lead manager. They are supported by a team of 13 analysts and managers based in offices in Sydney, Singapore, Edinburgh, and London. Despite the geographical spread, teamwork and the depth and quality of their equity research are hallmarks of their approach.
The strategy follows the proven methods of Stewart Investors’ Sustainable Funds Group, focusing on bottom-up, fundamental equity research often with defensive tendencies. The team seeks companies capable of delivering sustainable and predictable growth, evaluating them on three criteria: quality, profit growth, and valuation. These strict criteria usually narrow their list of investment ideas to just 20 to 70, with a focus on large-cap stocks.
This unique approach results in a portfolio that looks markedly different from a typical global equity index or many other global equity funds. Despite its large-cap focus, the portfolio generally avoids most popular mega-caps. It is typically characterized by a growth style with an emphasis on technology and healthcare sectors.
As of the end of October 2024, the team holds one position in the automotive sector. Indian automotive and tractor manufacturer Mahindra & Mahindra, part of the portfolio since 2017, is its largest holding at over 7 percent. This explains the fund’s significant exposure to the industry. Additionally, exposure to auto suppliers is achieved through a position in Knorr-Bremse. The choice of Mahindra & Mahindra has proven extremely profitable, with the stock delivering an average annual return of just over 50 percent over the past three years.
Ronald van Genderen is a senior manager research analyst at Morningstar. Morningstar analyses and evaluates investment funds based on quantitative and qualitative research. Morningstar is part of the expert panel of Investment Officer.