Europe’s Carmakers Hit Record High With Value Stocks Back in Vogue

(Bloomberg) -- Europe's auto stocks have started 2022 with a bang, hitting a record high as investors pile into cheaper sectors.

The Stoxx 600 Automobiles & Parts Index is the top-performing sector in Europe during the first three sessions of the year, up about 7.7% compared to a 1.4% advance for the benchmark gauge. Led by gains for Porsche SE and Daimler AG, the group has recouped all the losses spurred by worries about the omicron variant since the end of November, and analysts see more upside in the year ahead.

Value stocks have been coming back into fashion in recent weeks amid the prospect of higher interest rates. Europe's carmakers trade at a forward price-to-earnings ratio of about 7.4 compared with about 16 for the Stoxx 600 index. Automakers, which are still recovering from a chip shortage that disrupted production, are also trading below their 10-year average, with valuations near the lowest since March 2020.

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Analysts see more gains for carmakers after last year's 25% rally, with average aggregated price targets for the sector gauge implying about 15% upside in 2022.

Meanwhile, equity strategists also say the sector is attractive. “A value tilt still seems warranted,” in equities, Barclays Plc strategists led by Emmanuel Cau wrote in a note, reiterating an overweight position on energy, autos and reopening stocks, citing “very attractive valuations and strong growth prospects.”

Still, Europe's carmaking giants face risks, including the opening of Tesla Inc.'s German factory, according to JPMorgan Chase & Co. “The combination of a credible, competitive product offering from Tesla, locally produced in Germany a few hours from VW's group headquarters, should enable the firm to take substantial EV market share across Europe,” analysts led by Jose Asumendi wrote in a note on Wednesday.

The firm cut its 2023 volume growth forecast for the sector to 6% from 8%, citing a more cautious view on replacement demand amid the transition to battery electric vehicle technology.