Are You Considering Purchasing a New Car?

Good Morning Ladies and Gentlemen

“Life is unfair, but remember, sometimes it is unfair in your favour.”

Peter Ustinov

Germany’s Economy

Germany currently needs help with demand. The latest data on the country’s gross domestic product in the second quarter clearly shows that consumption and exports must improve. The weakness in consumption is attributed to a decrease in purchasing power caused by inflation. In real terms, employees earn 2.6% less in gross wages after adjusting for inflation compared to mid-2021. Additionally, real wages fell by 1% in the second quarter alone. The weakened consumption is particularly concerning because 75% of companies rely on domestic sales. While export earnings can contribute to job creation, a growth of approximately 10% annually is necessary to make a noticeable impact. However, exports are stagnant, and the export outlook worsened in August.

Macro Call

I do not consider myself a macro investor. As I have mentioned previously, I have reservations about the accuracy of most macro calls. In my opinion, attempting to forecast the market and make assumptions about economic developments seems akin to fortune-telling. I am a bottom-up investor. I focus on identifying sound companies trading at reasonable valuations that yield positive cash flows. Typically, I include 25 to 40 such companies in the portfolio, capitalise on dividends, and adjust the portfolio by rebalancing, adding new companies, and divesting others. This investment approach has proven effective for me and our private clients. The approach may seem a bit boring, and it certainly does not offer instant gratification, but it delivers sensible returns over time.

Bad News Creates Opportunities

As I assess the current macroeconomic conditions in Germany, it seems to me that market participants are perhaps overreacting by selling off strong German industrial companies at undervalued prices. While the reasons for this reaction are not surprising, given the prevailing uncertainty stemming from sluggish economic growth in the USA, China, and Europe, as well as comparatively high interest rates in various regions, I perceive potential opportunities within this environment, which, Ladies and Gentlemen, leads me to question whether this is now a matter of a macro call or a thorough bottom-up approach.

German Cars

In this week’s edition of “Stefan’s Weekly,” the headline asks, “Are you considering purchasing a new car?” This question is timely because of the recent rise in new car prices, causing consumers to be more careful with their spending, even more so in these challenging economic conditions and the still high interest rates, which has resulted in credit financing and leasing becoming more expensive, potentially reducing the desire to make a purchase. As a result, the automotive market is currently more favourable for buyers. There is no longer a supply shortage, purchase incentives are increasing, and transaction prices are decreasing.

An Opportunity?

The bi-weekly Swiss financial newspaper “Finanz & Wirtschaft” addressed the topic in its Wednesday edition. No significant improvement in the global car market environment is expected in the short term. Given the weakening demand in all leading markets, it is doubtful that the current year’s production forecasts will be maintained. However, looking beyond this, the picture is brightening. The economy appears to have bottomed out, and there are initial signs of improvement. Furthermore, more interest rate cuts by central banks are expected, especially in the USA. When the economy is weak, purchases are postponed, but purchases are made when the situation brightens due to the early cyclical nature of the sector.

A Question of Valuation

Volkswagen and Stellantis trade at a 2025 P/E of 3, BMW and Mercedes at a P/E of 5. Even if the forecasts have to be reduced in the weeks and months to come, the P/Es will go up accordingly; compared to Nvidia, whose stock is trading at a 2025 P/E of over 70, the German car sector seems cheap. We are patient investors and are, therefore, looking a bit closer at the industry.

Ladies and Gentlemen

As always, please share your opinion with me, but please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li

Many thanks, indeed!

I wish you an excellent start to the day and the weekend!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 153
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li