Trudging back in a recovery from the 2008 financial crisis, American automakers posted their most impressive sales in three years yesterday. Earnings are beginning to return as Americans demand new cars. Given the state of consumer confidence and the tenuous global macroeconomic situation, the strength in the auto market is surprising, but undeniable given the slow and steady nature of its return.
Some analysts are arguing that it will be difficult to uphold the impressive sales at General Motors (GM), Ford (F) and Chrysler, all of which have been steadily climbing back to strength as offerings from foreign markets encroach with more attractive price points. Most analysts are crediting the recent earnings strength at American automakers with the delays in car production from Japanese car manufacturers following the nuclear crisis. Now with many factories recovered and eager to make up for lost time, a flood of Japanese automobiles are entering the market. Supply shortages for both Honda (HMC) and Toyota (TM) are no longer an issue and while they have forfeited some of their dominance in the small and midsize segments over the past year, they may be gunning for a return, reducing bottom lines for the major producers out of Detroit. Many analysts agree that it will be difficult to compete in this segment as the market is flooded with fresh offerings.
Still, automakers from all parts of the market could benefit from the long backlog in demand, driving up the number of total cars sold for the year. Americans have been highly reticent to purchase new vehicles since 2007, when the first hints of the financial crisis struck. In the years since, the market has been essentially frozen, bringing the average age of a car on the road to about 10 years. This is the oldest cars have ever been in the US and as anyone who has owned an automobile knows: they don’t last forever. This in itself creates a natural demand and some believe that 2012 sales will benefit from this.
The question then seems less about whether or not demand for autos will rise next year, but how to play it from a market perspective. The warring notions that demand for U.S. made cars will be depleted by overseas offerings and the other and that the rise in sales is happening because American car makers finally have created cars that Americans actually want to buy, makes it difficult to make a determination on how to invest. On one hand, Ford and General Motors are well below the P/E ratio of the S&P but, on the other hand, their shares have done well in recent trading and could fall on a weaker than expected quarterly report.
For those confident that auto sales will continue to rise but unwilling to make a bet on one of the Detroit based enterprises, there are a number of ETFs and mutual funds holding a basket of global automakers designed to minimize risk. Fidelity Select Automotive (FSAVX) is one such option. The fund invests not only in automakers but the suppliers of tires and other parts that will benefit from the broader rise in cars rather than a specific car maker. There is also the NASDAQ Global Auto Index Fund (CARZ), which serves a similar purpose. The fund is designed to replicate the performance of the major and most liquid companies within the field, with 18 percent of its assets devoted to US automakers. The fund’s performance has been weak over the course of the year, having lost 20 percent in the past 52-weeks.
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