Auto Europe (AUT) : “The Big Short?”

The ETF Lyxor AUT (UCITS), created in 08/2006 is listed on Euronext (Euro) and tracks the Stoxx600 Automotive index. It allows the investor access to a basket of 18 major European stocks in the automotive sector, which are primarily German (58% of the capitalization).

The cost of this ETF is 0.3% in the middle of the range of our selection and the AUM is approximately € 39m. The replication method is indirect (via a swap) and the distribution method is by capitalization.

Alternative ETFs:  CARZ (First Trust, in USD) EXV5 (iShares in Euro)

 

Latest developments

The Automotive Europe index grew by 15.1% in 2017, significantly more than the Stoxx600NR (+ 10.6%), but it is down 3.3% in 2018, which compares to a stability for the benchmark, the Stoxx600NR.

The automotive sector is currently a major issue in D.Trump's protectionist policy because it is a major jobs provider. Increases in US tariffs on technology products to China have in turn led to an increase in tariffs on the US automotive sector, resulting in a first victim in the form of a profit warning: Daimler, part of which is manufactured SUVs in the US then sent to China and will be subject to new taxes.

Moreover, Trump does not hide his intention to tax the import of autos (German in particular) in a next step. Mexico and Canada are also particularly concerned by these measures. All in all, the entire supply chain could be disrupted by US protectionist actions, which could weaken the European sector, which is mainly represented by German manufacturers.

The European automotive sector is therefore under heavy pressure.

 

Index & components

This index could almost be qualified as German because the first three stocks account for c.42%of the index (Daimler: 20.7%, Volkswagen 10.6% and BMW 10.3%), while around a quarter of the index is composed of French stocks (Michelin, Peugeot, Renault, Valeo).

AUT is a rather narrow tracker which can be very volatile, because very cyclical, while deep transformations are in progress (electric car / autonomous car). The Chinese market is becoming the most important in the world and alliances are becoming an essential part of gaining market share.

The Volkswagen scandal on emissions - and the involvement of other manufacturers such as Renault and Fiat - are expected to deeply transform the market, which is likely to mean diesel deaths in the medium term and accelerating the transition to the hybrid and the all-electric a little later when batteries autonomy will allow it. A new factor of complexity is the US administration, much more protectionist and that will not facilitate the task of European manufacturers.

The intrinsically high volatility of this sector is expected to increase further in the future, while equipment manufacturers (Michelin, Continental and Valeo) represent a pole of growth and stability. Pressure on prices is high, but productivity gains are increasing and a number of manufacturers are doing well thanks to maintenance (spare parts, service). Another potential problem is the rise in interest rates, which if continued, could negatively impact sales of vehicles that are mostly carried on credit or leasing.

The current growth is mainly achieved in Europe and China, but in the longer term it seems to increasingly favor its domestic manufacturers and the electric car. The automotive sector is expected to remain volatile and face many shocks (technological in particular) in the future, while the electric car revolution accentuates the race to the critical size. Connectivity and the autonomous car will open the field to new disruptive industrial business models and new players like major technology companies could come to transform the industry in depth.