--> Top Picks : Renault, VW, DAimler, Michelin & Faurecia
--> Least-preferred : Fiat, Peugeot, Porsche, Nokian & Leoni
Auto companies are set to continue to operate in a supportive volume environment in 2014 with 4.1% growth in global light vehicle demand, after 3.2% in 2013. We expect European registrations to rise by 2.8% in
2014. China and North America are likely to remain key growth drivers (+9% and +3.3%), while we forecast LatAm volumes down 2%.
Still bullish on European Autos for 2014, short-term vulnerability
We remain bullish on Autos, a view aligned with our Economy & Strategy team’s stance on consumer discretionary stocks. Renault, VW, Daimler, Michelin and Faurecia are our top picks; our least preferred names are Fiat, Peugeot, Porsche, Nokian and Leoni. We downgrade Continental from Buy to Hold on valuation grounds. Short-term, the sector looks vulnerable after another strong outperformance in 2013.
Euro strength and forex volatility versus mid-cycle valuation
Euro strength, high volatility in emerging-market currencies (e.g. The Brazilian real) entering 2014 appear to be the main risk factors for the sector given high consensus earnings growth expectations built in for 2014-15. Sector valuation remains reasonable at about 10x earnings and 1.3x P/BV as we enter a positive European cycle.