Trade Conflicts & Environmental Regulations Among Factors Driving Stocks and Fixed Income Assets Lower

Europe’s automotive industry faces several potential impediments to growth, amid escalating trade disputes, rising commodities costs, geoplitical risks and technological advances.

Germany – the Euro Area’s leading market for vehicle production and sales – has seen some of its top producers buckle under the pressure of increased tariffs, while compliance with environmental regulations have contributed to lackluster earnings.

Indeed, German carmakers continue to contend with an increasingly complex and volatile landscape, which has generally spurred heightened jitters among equity investors and bondholders, as well as certain company profit warnings.

Slowing global and domestic growth, as well as Brexit concerns, are also among the more pressing risks faced by Germany’s auto producers, which include Daimler AG (DMLRY), Bayerische Motoren Werke (BMWYY) and Volkswagen (VLKAF).

Slowdown

The International Monetary Fund (IMF) said in its October World Economic Outlook (WEO) it downwardly revised its expectations for global growth by 0.2 percentage points to 3.7% for 2018, which is also set to soften over the medium-term.

Germany, in particular, is set to grow by 1.9% in 2018/19, a 0.6% slowdown from 2017, and a modest pullback in expected real GDP from earlier this year.

The IMF chalked-up some of the deceleration to trade-related tensions, and highlighted that sector-specific sentiment indicators for Germany’s automakers suggest “more pessimism about the outlook than at the start of the year.”

Moreover, German manufacturing orders fell by about 4% on a monthly basis in June – contributing to a 6.5% drop in the second quarter on a quarterly, annualized basis – followed by a close to 1% decline in July.

The IMF added that while the financial market impact of trade tensions has so far been contained to specific sectors, these industries include automobiles and aluminum.

Against this backdrop, some of Germany’s carmakers’ have suffered significant earnings damage.

Daimler’s Q2’18 EBIT, for example, plunged nearly 30% year-on-year to €2.64bn, with its Mercedes-Benz Cars division down around 20% over the same period.