Renault and Fiat shares have been enjoying a scintillating run. They have outperformed not only most other industrial companies last month but also their own auto sector whose shares rose by an average of 38 per cent in March. Renault saw the value of its shares rise by 102 per cent last month, while Fiat has seen its shares rise by nearly 90 per cent during the same period. Last Thursday, Fiat shares gained 27 per cent on the day.
But two swallows do not make a summer just as two robins do not make a spring. The car sector has of course suffered more than any other industry in the current global financial and economic slump. Many governments have rushed to the support of their domestic car sectors. After all, in countries such as France, Germany and Italy the car industry is still one of the largest industrial employers.
The various financial incentives provided by some governments have helped to stabilise – temporarily at least – the situation. The French, Italian and especially the German market all recovered last month thanks to the government incentives to scrap old cars for new ones. Countries that did not introduce such programmes continued to suffer, which was, for example, the case of Spain and the UK.
There is also a general but probably flawed perception that the car industry has finally reached the bottom of its current dramatic cycle. Sanford Bernstein analyst Max Warburton says that, in 1993, car sales fell 17 per cent but shares in the auto sector rose 50 per cent and gained another 20 per cent in the first half of 1994 when car sales finally stabilised. The pattern thus seems to be repeated this time round.
Mr Warburton in a separate report makes another good point. If the new US administration is seriously considering dropping GM and other US manufacturers from state financial life support, then this would be a further boost to European and indeed Japanese competitors. What is good for GM is good for America is the old saying. Mr Warburton now suggests that what is bad for GM is good for Europe and Japan by providing them with new market share opportunities in the US and Europe (that is, presumably, if Opel is taken out of the market). He calculates that the demise of GM could be worth €18bn ($24bn) of additional earnings before interest and tax top other car makers.
Yet for all these sound arguments, you probably still need to be a speculator to leap in and buy auto shares at this time. The overall situation remains pretty dire in the car industry.
As Fiat’s Sergio Marchionne told his shareholders at Fiat’s annual meeting, there is still too much production capacity – 94m cars – in the world car sector. That is 30m cars too many and unless restructuring is undertaken, plant utilisation will simply continue to fall from an average 75 per cent last year to 65 per cent this year.
The situation is far from rosy, but that is not stopping speculators making a lot of money right now. The irony is that for all the fuss about excessive executive pay, hardly anyone has raised an eyebrow over the fact that public funds being used to prop up structurally unsustainable auto industries are now indirectly helping to enrich market speculators.
United should lead way
Everybody knows football fans are more interested in what happens on the pitch than in what happens off it. For those hoping that Manchester United win the English Premier League, the finances of the club and its owners probably seem irrelevant. Under “club news” on their website, you can learn how to bid for a banner at Old Trafford’s Stretford End, but to learn more about the club or the holding company of the Glazer family that owns it, you will have to brave the archive of Companies House, where the statutory accounts for 2007-08 have now been filed.
Private companies are, by definition, private. But even though the accounts will be available within days, Manchester United could make more of an effort.
The Glazers’ £790m ($1.16bn) takeover in 2005 was partly financed by hedge funds, but the family should follow the precedent on transparency set by the private equity industry. Most of the largest UK buy-out firms voluntarily undertook in 2007 to publish a timely annual report for their largest portfolio companies.
Sir David Walker, a former UK regulator who drew up the guidelines, argued at the time that other “private equity-like” investors should join the drive for disclosure, as it would be in their interest to operate “with the ‘good citizen’ approbation that such commitment should attract”. He was thinking of sovereign wealth funds, but why not world-famous football clubs, too? Manchester United does not face the opprobrium suffered by private equity companies at their peak (except among rival fans). But not to lead the way in financial reporting, as the team does in football, looks like an own goal.
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