GLOBAL WEEKLY COMMENTARY

Disruption’s next target: cars

Apr 24, 2017 / By Richard Turnill

Key points

  • Technological disruption is cutting across sectors, with the auto industry a key example. We see risks for traditional auto players.
  • Centrist Emmanuel Macron became the clear front-runner for French president, reducing perceived European political risk.
  • Earnings season will be well underway in the U.S. and Europe this week. The yen will be a focus for Japanese earnings.

Technological disruption is becoming a key market theme, with its impact most clearly seen in the traditional consumer sector. The auto industry is no exception - hardly a day goes by without a headline on self-driving or electric vehicles (EVs).

Profit and cost breakdown of selected industries, 2016

Profit and cost breakdown of selected industries, 2016

Sources: BlackRock Investment Institute, MSCI and Bloomberg, April 2017.
Notes: Automobile and auto component companies are constituents of the MSCI ACWI Automobiles and Components Index. Technology hardware, software and services, and semiconductor companies are constituents of the MSCI ACWI Information Technology Index. The aggregate is based on the latest available full-year data. Profit is based on earnings before interest and taxes.

Traditional automakers and part suppliers are faced with serious challenges given that automation and electrification of vehicles require financial muscle and expertise that many currently lack. They generally have lower profit margins than the technology companies disrupting the auto industry, as the chart shows.

Cars and beyond

The tech sector has outperformed global equities this year, whereas consumer discretionary stocks have lagged. Now disruption is accelerating in the auto industry. We see advanced driver assistance systems (ADAS) shaking up the landscape in the near term. Semiconductor and software suppliers will be among the biggest winners, in our view, as many ADAS and EV components become the value-added parts of the vehicle. See our Future of the vehicle report for details.

We see implications beyond the auto industry. EV development should boost demand for metals such as cobalt and copper, underpinning an ongoing cyclical upturn. Rapid ADAS adoption could further reduce the value of used vehicles, pressuring leveraged auto lenders and leasing companies. Longer term, we see EVs and shared autonomous vehicles eroding oil demand and even shaking up the real estate landscape by reducing the demand for parking spaces.

Bottom line: For every winner that arises from disruption there will be many losers. We see most traditional automakers in a long-term structural decline, though those focused on luxury cars and emerging markets could do better. We are overweight technology, and see selected software and semiconductor companies as long-term winners in the transformation of the auto industry.

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  Date: vertical line Event
April 27 Bank of Japan (BoJ) and European Central Bank (ECB) monetary policy statements
April 28 U.S., UK Q1 GDP; a temporary U.S. federal government funding measure expires
April 29 European Union member states meet to discuss Brexit guidelines

Companies representing nearly 40% of the market capitalization of the S&P 500 Index, and those taking up 20% of the STOXX Europe 600 Index will report first-quarter earnings. Analysts are upbeat, with low double-digit earnings growth expectations for European firms in 2017. The yen’s strength will be a focus for Japanese earnings after its depreciation last quarter helped companies beat expectations.

  • Business-friendly and pro-European Emmanuel Macron became the clear front-runner for French president after winning the first-round vote, materially reducing perceived European political risk.
  • UK Prime Minister Theresa May called an early election, aiming to increase her party’s majority in Parliament ahead of Brexit negotiations. UK stocks fell while the British pound rose.
  • Oil fell to its lowest level in more than two weeks after U.S. oil production increased and gasoline inventories rose unexpectedly.

Global snapshot

Weekly and 12-month performance of selected assets

 

EquitiesWeekYTD12 MonthsDiv. Yield
U.S. Large Caps 0.9% 4.9% 12.3% 2.1%
U.S. Small Caps 2.6% 2.1% 23.3% 1.3%
Non-U.S. World 0.0% 7.5% 8.7% 3.2%
Non-U.S. Developed 0.1% 6.7% 6.7% 3.3%
Japan 1.4% 5.0% 8.0% 2.3%
Emerging -0.1% 11.9% 15.3% 2.7%
Asia ex-Japan -0.4% 13.6% 15.7% 2.6%
BondsWeekYTD12 MonthsYield
U.S. Treasuries 0.0% 1.6% -0.1% 2.2%
U.S. TIPS -0.5% 1.6% 2.5% 2.1%
U.S. Investment Grade 0.0% 2.4% 3.7% 3.2%
U.S. High Yield 0.1% 3.2% 13.4% 5.8%
U.S. Municipals 0.3% 2.7% 0.7% 2.3%
Non-U.S. Developed 0.4% 3.8% -3.3% 0.7%
Emerging Market $ Bonds 0.3% 5.0% 8.3% 5.4%
CommoditiesWeekYTD12 MonthsLevel
Brent Crude Oil -7.0% -8.6% 16.7% $51.96
Gold -0.3% 11.9% 2.9% $1,284
Copper -1.2% 1.6% 12.5% $5,623
CurrenciesWeekYTD12 MonthsLevel
Euro/USD 1.1% 2.0% -5.0% 1.07
USD/Yen 0.0% -6.7% -0.3% 109.09
Pound/USD 2.5% 3.9% -10.5% 1.28

Source: Bloomberg. As of April 21,2017.
Notes: Weekly data through Friday. Equity and bond performance are measured in total index returns in U.S. dollars. U.S. large caps are represented by the S&P 500 Index; U.S. small caps are represented by the Russell 2000 Index; Non-U.S. world equity by the MSCI ACWI ex U.S.; non-U.S. developed equity by the MSCI EAFE Index; Japan, Emerging and Asia ex-Japan by their respective MSCI Indexes; U.S. Treasuries by the Bloomberg Barclays U.S. Treasury Index; U.S. TIPS by the U.S. Treasury Inflation Notes Total Return Index; U.S. investment grade by the Bloomberg Barclays U.S. Corporate Index; U.S. high yield by the Bloomberg Barclays U.S. Corporate High Yield 2% Issuer Capped Index; U.S. municipals by the Bloomberg Barclays Municipal Bond Index; non-U.S. developed bonds by the Bloomberg Barclays Global Aggregate ex USD; and emerging market $ bonds by the JP Morgan EMBI Global Diversified Index. Brent crude oil prices are in U.S. dollars per barrel, gold prices are in U.S. dollar per troy ounce and copper prices are in U.S. dollar per metric ton. The Euro/USD level is represented by U.S. dollar per euro, USD/JPY by yen per U.S. dollar and Pound/USD by U.S. dollar per pound. Index performance is shown for illustrative purposes only. It is not possible to invest directly in an index. Past performance is not indicative of future results.

Asset class views

Views from a U.S. dollar perspective over a three-month horizon

Table: Asset class views from a U.S. dollar perspective

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Richard Turnill
Global Chief Investment Strategist, BlackRock Investment Institute
Richard Turnill is Global Chief Investment Strategist for BlackRock. He was previously Chief Investment Strategist for BlackRock’s Fixed Income and active ...
Isabelle Mateos y Lago
Chief Multi-Asset Strategist
Kate Moore
Chief Equity Strategist
Jeffrey Rosenberg
Chief Fixed Income Strategist