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In focus: Engines for growth in auto sector

The automotive sector is cruising ahead at a steady speed, having gone through the bumps of the COVID-19 pandemic. With mid-single-digit earnings growth and stable margins projected for this year and next, we believe the sector remains viable for opportunistic investors.

However, as with car purchases, picking the right stocks matters. At Templeton Global Equity Group, our focus is on original equipment manufacturers (OEMs) that we believe can navigate the sector’s cyclical risks with robust financials and shareholder return potential.

Investment outlook

In North America, the US economy remains resilient, and our global portfolios now have greater exposure to cyclical sectors such as financials and materials. Additionally, the communication services sector continues to offer attractive value. In Europe, interesting themes we continue to monitor when analyzing companies include the resilience of the consumer, inventory destocking and the geopolitical backdrop. In Asia Pacific, signs of earnings recovery have emerged. Our conviction in Japan remains high and we prefer rate hike beneficiaries, especially banks, but domestic consumption sectors may be affected by a weak Japanese yen.

Market review: May 2024

Global equities rallied in May 2024. As measured by MSCI indexes in US dollar terms, developed market equities outperformed a global index, while emerging market and frontier market equities underperformed it. In terms of investment style, global growth stocks significantly outperformed global value stocks.

The rally in May was driven partly by investor optimism about the economic growth outlook and expectations for interest-rate cuts in Europe and the United States this summer. Generally robust corporate earnings results reported during the month and enthusiasm about AI further bolstered investor sentiment. Global manufacturing activity expanded in May for the fourth consecutive month, while flash reports for May indicated services activity expanded across regions.

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.

Equity securities are subject to price fluctuation and possible loss of principal. Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks. There can be no assurance that multi-factor stock selection process will enhance performance. Exposure to such investment factors may detract from performance in some market environments, perhaps for extended periods.

Active management does not ensure gains or protect against market declines.

International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically. The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries. There are special risks associated with investments in China, Hong Kong and Taiwan, including less liquidity, expropriation, confiscatory taxation, international trade tensions, nationalization, and exchange control regulations and rapid inflation, all of which can negatively impact the fund. Investments in Taiwan could be adversely affected by its political and economic relationship with China.

Investments in fast-growing industries like the technology sector (which historically has been volatile) could result in increased price fluctuation, especially over the short term, due to the rapid pace of product change and development and changes in government regulation of companies emphasizing scientific or technological advancement or regulatory approval for new drugs and medical instruments.

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