European car stocks have fallen to their lowest valuation, but investors are still choosing to avoid them.

European car stocks are currently very unpopular, to the point that investors are continuously reducing their holdings. The problems in the European car industry have led to its valuation nearing historic lows, which is usually a major motivator for potential buyers. Data shows that the Stoxx 600 Automobiles and Parts Index is one of the worst-performing indices this year. Analysts predict a 13.6% decrease in profits for European car manufacturers by 2024. Investors believe that significant cost cuts have become inevitable due to complex technological transitions, intensified market competition, and consumers becoming increasingly price sensitive. Analysts state that economies of scale will be crucial, especially for mass market brands like Volkswagen. The current price-to-earnings ratio of European car stocks compared to the broad-based Stoxx 600 index represents nearly a record discount of 60%. A survey by Bank of America this month found that among European fund managers overseeing $284 billion in assets, automotive stocks are the most undervalued. Rolf Ganter, Chief Information Officer of European Equities at UBS Global Wealth Management, stated: "Pricing has been stepped down from peak levels, sales growth has stalled, and rising labor costs have left some stocks with further downside. If the situation deteriorates, they could easily fall another 10% to 20%." "Valuations are really cheap, but we are fundamentally negative on this sector." Stock prices of Volkswagen, BMW, Mercedes-Benz, Renault, and Stellantis have dropped by 29% to 50% from their peaks this year, hitting multi-month or multi-year lows. Gilles Guibout, Head of European Equity Strategy at AXA Investment Managers, said: "Western carmakers are facing a huge challenge from Chinese cars, people are not willing to spend as much money on electric cars as they did a few years ago." "Either you can raise prices and justify to customers that the premium is reasonable, meaning your brand is worth a premium. Or you have to cut costs. There is no other choice." In August of this year, EU car sales dropped by over 18% year-on-year. Sales of pure electric cars dropped by 44% year-on-year, with steep declines in Germany and France, the two largest electric car markets in the EU. Andreas Bruckner, Investment Strategist at Bank of America, said: "There could be quite a lot of profit warnings, indicating that it may not be the time to buy European car stocks right now." Several major car manufacturers have scaled back their electrification plans due to cooling demand for electric vehicles among European consumers. Volvo Cars in Sweden recently abandoned its goal of achieving full electrification by 2030. Carlo Franchini, Head of Institutional Clients at Banca Ifigest, said: "For electric cars, you need to solve the most basic issues first, such as power generation and the system that makes this project feasible." "It's not a good idea to bet on the car industry right now. Reducing exposure is definitely not a bad idea." However, there are risks to withdrawing from electrification. Renault CEO Luca de Meo recently warned that European car manufacturers exceeding EU carbon emission limits in 2025 could face fines of nearly $20 billion due to slowing demand for electric cars. Chiara Robba, Stock Director at Generali Asset Management LDI, said: "It's hard to say whether the negative news about the European car industry has bottomed out. Even with attractive valuations, it could be a value trap without a recovery." "The industry needs comprehensive support for supply chain, manufacturing, and charging infrastructure transformation to help improve demand for electric vehicles."