After more than two months of silence, it appears that the two major economic powers of the world – the US and China – are back on speaking terms. In the interim, after a slew of tit-for-tat tariffs, the silence was deafening, with world markets jittery and volatile. While day-traders loved the ensuing volatility, most long-term investors were hesitant to commit new money to their portfolios.
Every time there was a US-China news story, nervous portfolio managers and retail investors would adjust their holdings. Well, it looks like a ray of sunshine has appeared, and maybe – just maybe! – investors can now start putting their portfolios on auto once again.
A glimmer of hope for portfolios
Since 2008, China’s domestic passenger (and commercial) vehicle sales have been steadily increasing. In 2008, Chinese consumers bought 6.76 million passenger vehicles (2.63 m), and that number continued to show a rising trend. From 2014 to 2017, the growth continued – 19.71M (3.79M); 21.15M (3.45M); 24.38M (3.65M) and 24.72M (4.16M) units.
However, something dramatic has happened so far this year. Since the start of the year, only 17.26 (3.23) units were sold – and we are almost at the end of the year. Clearly, the US’s “Tough on China” policy has had an impact on auto prices in China – which has reduced consumption. Well, all that is now set to change with a glimmer of hope appearing in an announcement of the Chinese government.
The Chinese Foreign Ministry announcement that the government is considering a cut on duties for imported autos, bringing them down from 25% to 15%, is music to the ears of auto manufacturers worldwide. Although these cuts are monumental – by Chinese standards, we need to put them in perspective. In the US, similar duties stand at a mere 2.5%. And while the Chinese have a long way to go to match that number, 15% is a good start.
Together, the cutting of duties on imported cars, and the fact that there may be further high-level meetings between leaders of the two countries, these two announcements provide a glimmer of hope for the auto industry globally. It’s time to put your portfolio in auto too!
Adding auto-focus to your portfolios
So, how could investors capitalize on this positive development for the auto sector?
The underlying thesis for building an “Auto Portfolio” is that the recent signals coming from Washington and Beijing will provide momentum for a greater “ceasefire” in the ongoing trade war between the two nations. If that happens:
- Global auto manufactures, with operations in China or selling into China, will benefit
- Auto-parts and supplies manufacturers, who are selling to the car manufacturers, will also get a piece of that pie
- Other domestic Chinese auto manufacturers and auto part producers will also see benefits from a booming domestic auto industry
Like any other investment idea, there is downside to this story too. Other non-auto-related factors, such as defense or foreign affairs, could potentially derail the nascent recovery that some of the names in the suggested portfolio are seeing of late.
So, what would an “Auto Portfolio” look like?
Well, here are a few names to consider. The portfolio is a mixed bag of US, European and Chinese names, and come from an array of vehicle manufacturers, parts producers and auto-financing companies.
Some of these names, like DORM, aren’t directly exposed to the Chinese market, but their customers (in Europe, the United States, Middle East, Mexico, Canada and Australia) will certainly benefit from positive moves in the global auto industry. And what’s good for their customers, is certainly good for DORM!
Other names, like GELYY, are auto/auto-related players who operate predominantly in the People’s Republic of China – which gives their share price greater torque from a booming domestic auto market. The one similarity that all of these names share is the trajectory of their price movement chart. In each case, the chart seems to indicate an uplifting trend, likely as a result of recent news.
Investors that don’t have the patience to research each of these names individually, in order to ascertain if any/all of them are a good fit for their portfolio, have other options to build an “Auto Portfolio”.
Take a look at First Trust NASDAQ Global Auto ETF (CARZ) – a market-cap-weighted index fund that tracks a basket of global auto manufacturers. With a MER of 0.70%, the fund has a current yield of around 2.5%. The great thing about CARZ is that it offers truly global exposure – Japan, USA, Germany, France, China, South Korea, Italy, Malaysia, through 34 holdings in a single vehicle (no pun intended!). What could be simpler than that!
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Author does not have investment in stock discussed in this article.