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Lane-hopping to beat the traffic may not be the safest way of driving but it can pay off. Investors have certainly not been slow to put money into Europe's bedraggled auto stocks recently. The sector is up 11 per cent since the start of the year, more than double the rise in the Euro Stoxx 600. Unusually, it is the German car makers which have been the laggards – partly due to domestic market weakness and partly because of uncertain Chinese demand at the premium end. Renault SA shares, by contrast, have been going full throttle, hotly pursued by Fiat SpA, which has benefited from speculation that a full tie-up with Chrysler Group LLC is close.
The extent to which fundamentals fuel this rally is still debatable. Monthly sales figures for western Europe improved in April, when they registered the first overall year-on-year increase in more than 18 months. But May looked bleak again: trade data suggest that four of the big five markets posted sales declines. Volkswagen AG continued to label the region overall as "difficult" last week, when it reported a 7 per cent sales decline for VW-branded cars in the first five months of 2013. True, Michelin's tyre data were more encouraging (European May volumes were flat year-on-year). But consultants AlixPartners are nudging down their 2013 estimate for total European light vehicle sales to 17.5 million from 17.9 million units. That is one-fifth down on 2007 levels.
Investors may not care exactly when the industry reaches its trough – which even AlixPartners expects in 2013/14. Autos have been the cheapest way into any cyclical upturn in Europe: the sector still trades on a nine times 2014 earnings multiple. But they should worry about the trajectory ahead. Capacity cuts have been far less severe than in the U.S. and AlixPartners reckons 60 per cent of Europe's top 100 plants are operating at under 75 per cent utilisation. That may be a big future check on the sector's speedometer.
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