Joice Alves

LONDON (Reuters – European automotive stocks shot up more than 2% Wednesday, as investors became increasingly optimistic about the sector in light of growing car sales expectations by 2022.

Over the past months, investors’ enthusiasm for car stocks in the region has been ignited. Europe’s auto index and its parts index have risen by more than 8% in the week to date. This is in addition to a record November high.

Sector has seen a 33% increase in one year. This is more than the pan-European index which saw a 23% gain over the same time period.

Graphic: Auto sector versus STOXX- https://fingfx.thomsonreuters.com/gfx/mkt/zgvomaraavd/Auto%20sector%20versus%20STOXX.png

After the two-year period in which carmakers were faced with high inventories due to sales slowdowns, it has been a turnaround for the sector, despite the 2021 shortage in chips supply. This forced some companies to stop production.

BMW shares rose 2.3% following the announcement that it had achieved records in sales for its BMW brand, surpassing 2019 levels.

BofA anticipates that European light vehicle sales and production will increase by 10% in 2015, thanks to Daimler’s Mercedes-Benz. Renault Stellantis and (PA:), leading the charge with projections of growth rates around 20%.

Horst Schneider (BofA research analyst) stated that “we believe there is still considerable catch-up potential and we remain optimistic on light vehicle sales growth for FY22.”

There is room for growth

Analysts said that higher car prices for 2021 will offset an increase of costs during the second half. However, European cars stocks remain much cheaper than their American counterparts.

Europe’s auto industry trades at seven times its forward earnings. This compares with 16.8 times the benchmark, and 42.4 times the U.S. automotive sector. The market capitalization of U.S. automaker Tesla (NASDAQ) is twice that of the STOXX 600 index.

“Autos are extremely cheap but profitability is high given an excellent price mix. Even on lower volumes and chip shortages should ease,” stated Emmanuel Cau, equity strategist. Barclays (LON:).

Renault shares surged 4.4% following the announcement by U.S. chipmaker Qualcomm, (NASDAQ:), that deals had been made to supply French carmaker Volvo Cars as well as U.S. chipmaker Qualcomm.

Stellantis shares rose 3.4% when the Milan-listed firm teamed up with Amazon.com. (NASDAQ:). The partnership allowed Stellantis to build cars and trucks that use Amazon software, and also deploy electric vans in Amazon’s delivery networks.

Daimler also saw a 3% increase in shares despite the fact that it informed luxury vehicle owners about a potential technical issue that could cause a fire, according to reports.

JP Morgan did not believe everyone was bullish. JP Morgan reduced its projections for European light cars’ production growth from 4% to 6% in 2022 and 2023. This is due to consumers’ hesitancy about buying internal combustion engine vehicles, which delayed the purchase of electric vehicles, as well as the lack of chips.

Barclays believes that the space for parts and automobiles is on track to grow, despite the fact that demand continues outstrip supply.