There seems to be a consensus amongst investment analysts that the auto sector is one of the most attractive equity investments for 2015. I am of the opinion that this evaluation is fair despite the recent surge in equity prices to record levels. I also am convinced that the European Auto sector will continue to outperform for a few more years.
My conviction is based on the belief that the Auto sector is going through a golden age. This is the part in the product cycle when the main parts come together. Here I refer to reliability, comfort, safety and more recently fuel economy.
This evolution is the result of ingenious advances in technology, especially electronics, often as a reaction to forced costs from regulation and high commodity prices. However, the industry has managed to stay on top.
This curve in the history of the car will probably peak in a few years’ time as the first stage of this evolutionary process will come to a natural end. For the investors in the auto industry, especially the luxury end of the market, I suggest that you hold on to the shares for a few more years.
Still this golden age will probably remain the peak for the car industry. What follows is how I believe the history of the car will develop.
1. The kings of the road
Cars have been around for over a hundred years. Karl Benz built the first self-powered motor vehicle in 1886. These cars become the Mercedes-Benz, named after the daughter of their best salesman Emil Jellinek.
These early cars were considered somewhat as novelties to the point that some cities required a person with a red flag to walk before the cars warning passers-by of the hazard.
Ford changed the game in 1908 when it developed the Model T. These were the first mass produced cars and unlike previous cars, which were intended for the elite, were accessible to the general public.
It also started a global craze that eventually led to today’s luxury living spaces on wheels, formula one racing and maybe even global warming.
However, the main characteristic that mostly defines this era is personalization. Car now occupy a special place in our lives, often mirroring one’s image, or the image one wants to portray.
It is a fact that if a car is found somewhere without any identification markings, the auto factory is able to trace that car to its owner. There are so many options available in a new car that in reality the number of new cars that are exactly the same is small.
2. The bus lane
The next era will be characterized by the sharing and public transport. Cars have become a pest to many. Government have to contend with infrastructure, greens are concerned about global warming and technology firms want to sell the idea that computers are better drivers.
This era sees a shift from personal cars to communal cars. Authorities are already making it more expensive to drive and easier to take a bus. It will take time, but at some point the number of people using communal transport will far exceed those using private transport.
3. The Google car
The third era will be an era where, due to regulation or efficiency, communal transport will have surpassed private transport. The only private transport that will be allowed will be self-drive cars. Autonomous driving is already the next big thing in the auto industry.
Elon Musk, owner of Tesla, has already set the direction for the future. Elan Musk believes that in the future people will not be allowed to drive as this will be too dangerous. At the current pace of technological progress this reality is not too far into the future.
Unfortunately this will also mean that the car enthusiast will only be able to drive a car on race tracks. I believe that this will also spell the end to the auto sector.
4. From A to B
Eventually personal cars will become absolute. If you want to go somewhere you will take public transport which will not have a driver, but will be perfectly on time and safe. Otherwise, if you are willing to pay more, you can call a car, which will pick you from point A and take you to point B in comfort, always without a driver.
While, the above scenario probably spans decades, it depicts the focus that is currently characterizing the sector. In this scenario, investment in the luxury end of the sector would probably give the best returns in the next three to five years. Alternatively, companies like Valeo, which continue to lead development in auto technology, may be a riskier but more rewarding alternative in the long run.
This article was issued by Antoine Briffa, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.