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Stocks

Investors breathe new life into auto stocks

Nikkei nears 21-year high amid bets on electrification, autonomous driving

With Japanese carmakers like Toyota operating out of Mexico, the risk of changes to the North American trade pact weighed on their stocks.   © Reuters

TOKYO -- Investors have poured into Japanese auto stocks in recent weeks as nagging risks since the beginning of the year dissapate.

The Nikkei Stock Average hit an almost 21-year high on Wednesday. Automakers were a major factor, with the subindex for the industry having recovered notably since the start of September.

Hedge funds had been among those shorting auto stocks as part of a long-short investment strategy, but are now moving to square positions as their share prices rise. Toyota Motor's price-to-book ratio slipped below 1 at one point amid a barrage of selling. Yet the carmaker's share price bounced back to 7,000 yen for the first time in about nine months on Tuesday.

Retreating risks

The market has been encouraged by three fading risks. Since the start of the year, investors have fretted over U.S. President Donald Trump, declining new-car sales in the U.S. and a strong yen. 

For automakers, the most worrying proposal by Trump was the implementation of a border tax on imports, a plan that does not seem to be gaining much traction. The U.S. also seems unlikely to leave the North American Free Trade Agreement, or to revise the trade pact's tariffs higher.

U.S. sales -- the cash cow for Japanese automakers -- appear to have turned a corner, rising for the first time in nine months in September. The Another concern had been the specter of falling used-car prices leading to heftier sales incentives and weaker sales financing operations. But "used-vehicle prices have stabilized, decreasing the risk to financing operations," explained Takaki Nakanishi of the Nakanishi Research Institute. 

The exchange rate has also provided a tailwind. Toyota forecast rates of 110 yen to the dollar and 124 yen to the euro for the full year, but the yen is currently softer than projected against both currencies. The market priced in an overly pessimistic scenario, according to equities analysts, who say share prices can be expected to recover to a degree.

Betting on the future

How high carmaker shares go will depend on their game plans for emerging countries and electrification.

Auto production is expected to climb 14% from 2017 estimates to 108.5 million units in 2024, according to London-based research firm IHS Markit. Emerging countries will drive this growth, with Russian and Indian output expected to climb 8%, while production in Europe, Japan and the U.S. remains largely flat. Mitsubishi Motors and Suzuki Motor, which both have large presences in emerging nations, have seen their share prices surge roughly 40% this year. 

Referring to the shares of American automaker General Motors, Norihiro Fujito, director of investment research at Mitsubishi UFJ Morgan Stanley Securities, said: "It is basically behaving like an information technology stock." The price shot up to around $45 after the company on Oct. 2 announced a strategy for electric vehicles and related technology through 2023.

"GM shares symbolize the lofty expectations for automated driving and the shift to electric vehicles," Fujito added. 

Meanwhile, scandals such as Nissan Motor's illegitimate vehicle inspections and Kobe Steel's falsified data have cast doubt on the made-in-Japan brand. Automakers' share prices will be swayed by how well each company can tap into emerging markets and ride the sea changes in automotive technology.

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