Auto Stocks Seen Getting Crushed As Trade War Expands To Mexico

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Auto Stocks Seen Getting Crushed As Trade War Expands To Mexico

President Trump’s escalating trade fights have wreaked havoc for American and global automakers. Trade worries with China contributed to a 12% drop in 24 global auto equities from May 1 to Thursday, including General Motors Co. (GM) and Ford Motor Co. Now, the firm is seeing additional losses in Friday trade after Trump declared tariffs on all Mexican exports by June 10.

If the Mexico tensions continue, auto stocks could drop an additional 5% to 10% in the second half of 2019, wrote Evercore ISI analyst Chris McNally in a note, per a detailed Bloomberg report. “Given this Mexico news was a big surprise, the short-term move in stocks can be anticipated to be even more severe,” wrote McNally.

President Trump’s threat to impose a tariff as high as 25% on Mexican goods puts the entire U.S. auto supply chain at risk as these companies rely significantly on Mexico to provide both components and manufactured cars.

US-Mexico Trade War Weighs on Auto Supply Chain

  • Trump has threatened to levy tariffs of up to 25% on Mexican imports.
  • According to Evercore ISI, auto stocks might fall another 5% to 10%.
  • The Supercomposite Automobiles and Components Index is on pace to have its weakest month since December.

Source: Bloomberg

Through Thursday, the conflict already had trimmed 12% from the 24-member S&P Supercomposite Automobiles and Components Index, shaving about $20 billion in market value from carmakers, per Bloomberg. The sector is on track for its worst monthly performance since December, when it posted a 14% loss. McNally at Evercore ISI noted that the latest crisis has caused the market to largely forget about risks surrounding dismantling the North American Free Trade Agreement.

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Goldman Sachs echoed the downbeat sentiment in a note to clients, per Bloomberg, saying, “without a response from manufacturers or the supply base to shift production footprints, this would likely increase the price of vehicles for the consumer and negatively impact automaker/supplier margins.”

Trump’s tariffs also are likely to impose major disruption and costs on BMW AG as it prepares to open the doors at a $1 billion factory in Mexico. The plant was expected to account for 20% of its North American production, per Bloomberg.

Data from Deutsche Bank and the US government show that the three American automakers rely significantly on Mexico for material. According to CNBC, Fiat Chrysler Automobiles NV (FCA) relies on Mexico for 24% of its imported content and 18% of its imported automobiles, while GM relies on Mexico for 29% and 13%, respectively. Ford has a 17% market share in both categories. According to Reuters, Citi estimates the overall impact to GM’s yearly revenues at “several hundred million dollars.”

According to RBC, Tesla Inc. (TSLA) sources around 25% of the content for the Model 3 automobile from Mexico.

Looking Ahead

One thing is certain. Trump’s proposed tariffs will hurt automakers as well as the larger US and North American economies. “This will have an effect on consumer spending.” This will have an effect on business profitability.” According to Kristina Hooper, chief global market strategist at Invesco, “Markets were already panicking due to current tariffs.” We’ve only added fuel to the flames.”

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