- Technological disruption is cutting across sectors, with the auto industry a key example. We see risks for traditional car manufacturers.
- 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).
Chart of the week
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.
- Geopolitical tensions lifted safe-haven assets. The yen hit a five-month high versus the US dollar. Year-to-date global bond fund inflows now exceed equity fund inflows, EPFR Global data shows.
- The French presidential race became a tighter, four-way race. Uncertainty on who will enter the final round hurt the euro and sent 10-year French bond yield to a six-week high versus its German peer.
- Several US banks posted solid earnings for the first quarter. Management guidance was positive and we expect additional upside to earnings from regulatory and tax reform.
|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 capitalisation 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.
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Sources: Bloomberg unless otherwise specified.
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