Sector Bird’s Eye View: Auto

by | 10 Oct, 2019

What is it?

The auto, automotive, or car industry is involved in the design, development, manufacturing, marketing and selling of motor vehicles from cars to trucks and motorbikes. It also extends into the parts market, which comprises of companies involved in the production and sale of new, replacement, and aftermarket parts for vehicles. 

Why is it important?

The auto industry is a major driver of many nations’ economies, especially in the developed world. As the population expands, the demand for transport increases with it, giving a never-ending supply of consumers to the auto industry. Europe, in particular, is the world’s auto manufacturing hub, producing 23% of the world’s cars in 2018 alone. The auto industry is also highly labor-intensive which aids national employment levels, and in turn, boosts GDP.

Popular Participants

  • Auto makers: Volkswagen, Ford, GM, Tesla
  • Parts makers: Advance Auto-parts, Genuine Parts, AutoZone

Popular ETFs

  • S&P 500 Automobiles
  • First Trust Nasdaq Global Auto Index

When does it do well/badly?

The auto industry is highly cyclical and vulnerable to changes in the business cycle and interest rates. Recessionary conditions and higher interest rates cripple consumers’ disposable income, making purchasing vehicles harder. However, lower interest rates and expansionary conditions drive strong consumption in the auto market. The globalized nature of the auto industry also makes it vulnerable to changes in trade relations and geopolitical risk. Higher levels of risk can impact export levels and cause automakers to suffer as a result.

Why should I invest? 

Most successful portfolios have an automobile component, as the industry is always changing and new opportunities are plenty. Automobiles are also a useful way to gain exposure to a foreign nation’s growth if you invest in an overseas company. Staying on trend with the latest ranges from the popular car brands can generate strong returns for an investor with an eye for what will sell. These larger auto companies also often have attractive dividend schemes that add a useful cash component to a portfolio. 

 

 

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