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(Bloomberg) -- After a dismal year, shares of Europe’s automakers are finally finding some positive momentum as signs of additional Chinese stimulus draw investors to the sector’s lowly valuations.
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The Stoxx 600 Autos and Parts Index is up more than 4% in December, set for its best month since February, though is still down the most of any sector in the broader benchmark year-to-date. Even after the recent gains, carmakers trade at a discount of more than 50% to the Stoxx 600 Index, with Volkswagen AG having a multiple of less than four times next year’s estimated earnings.
Such depressed valuations have led traders to seek out bargains, particularly as carmakers are among the biggest potential beneficiaries of recent Chinese stimulus measures. Worries over China and the prospect of US tariffs have eased, at least temporarily, but remain ever present in investors’ minds.
“The strong performance in December seems fueled by the hope that estimates are finally low enough, new tariffs are priced in and on that basis autos still look cheap,” said Stifel Financial Corp. analyst Daniel Schwarz.
A report that Honda Motor Co. and Nissan Motor Co. are exploring a merger provided a further lift to the sector on Wednesday, particularly Nissan partner Renault SA, which gained as much as 7.4%.
Technical indicators suggest investors are turning their attention back to the industry. The relative strength index, a momentum indicator which shows the magnitude of recent price changes for stocks, briefly hit overbought territory last week. The last time it was this high was in April following two months of gains.
The carmakers’ recent revival can also partly be explained by investors closing short bets on the sector, according to Pierre-Olivier Essig, an analyst at AIR Capital.
Individual turnaround stories have also helped. Stellantis NV was among the biggest laggards this year, but got a boost from the ousting of Chief Executive Officer Carlos Tavares, who paid the price for failing to revive the firm’s weakening sales. Bank of America Corp. analysts are positive about the stock, and expect the carmaker to improve production volumes.
BMW AG also got a lift when it was upgraded recently at Jefferies, whose analysts said the company looks comparatively well positioned on key issues like China and emissions compliance for next year. BMW is down 22% in 2024, hit by a major recall and Germany’s high energy and labor costs.
Even Volkswagen, which remains embroiled in a labor dispute over cost cutting, has its followers. AIR Capital’s Essig has assigned it a price target of €180 ($189), one of the highest compared with analysts tracked by Bloomberg.