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COVID-19 Will Wreck The Car Industry

Apr. 01, 2020 6:06 AM ETMBGAF, F, GM, NSANY, PEUGF, TM, TSLA, VWAGY41 Comments

Summary

  • The short and long term effects of the pandemic on the car industry are going to be disastrous.
  • The car industry is likely to be hit much worse than other parts of the economy – and this is NOT priced in already.
  • I will show you why the car industry will continue to be affected by the COVID-19 pandemic even after the pandemic has been overcome.
  • I recommend selling your car-related stocks.

Lately, the economy has been in turmoil. No sector is being spared in this downturn due to the COVID-19 pandemic. Major economic shutdowns like those happening now are almost unprecedented and are leading to disastrous performance of stocks across the board. In this article, I will argue why a single sector – the car industry – is going to be hit by this global pandemic more than other sectors, and in a more long-lasting way. I will also show that this is not priced in at the moment. I will show this using 3 main arguments.

car crash

Reason 1: demand side dry-up

It is generally accepted that car sales are usually solid in a flourishing economy and bad as the economy turns sour. Of course, the car industry has always been a relatively volatile one, which means that one would expect car producers to take a major hit when a crisis like this happens. One of the main indicators which can predict how bad it is going to be is the weekly initial jobless claims, which has skyrocketed lately:

weekly job claims

If people lose their jobs, the first spending they will probably cut is their discretionary spending, such as luxury items, holidays, and new vehicles.

The general theory is that over time, demand for cars will likely be restored, or such as it was after the previous economic crises. Let us take a look at the demand for vehicles in the world’s two main economies: China and the US:

US car salesUS car sales (in million per month)

China car salesChina car sales (per month)

As you can see, vehicle demand in the US during the great recession of 2008-2009 dropped by about 50%. In China, this crisis is barely noticeable in the chart because car sales continued to grow quickly after this. If you look closer, you can argue that car

This article was written by

I am a private investor from the Netherlands in my mid thirties. I have a very long term view and with my own investments I focus on a combination of stable, dividend-paying investments, and growth stocks. My favorite holding period is forever, but I am looking for new and interesting opportunities. I am writing for Seeking Alpha because I like to share my insights and enjoy the interaction about investing ideas. My writing is mostly about stocks I own, and others I am interested in.I have a university degree in engineering and professional experience in many industries, including government, engineering, supply chain, mobility and IT. But please do not read investment articles because the writer has nice degrees or fancy references. Read my articles because I provide an authentic, humble and realistic voice with some good old common sense.In the picture you can see my cat, who sadly died a couple of years ago. He has been the logo of Giesbers Investment Strategy since its inception. I chose his picture since my investment strategy mimics his behavior: more than 90 percent of the time, investment means doing nothing, and my cat was a genius at this. Also, during brief periods of time he could become very agile and active, just like what I should do when I notice great investing opportunities. Also, my cat was very picky with his food, which a good investor should also be with his holdings. Only the very best is good enough.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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