The best time to invest in the automotive sector is when the economy is emerging from a recession and interest rates are low. This part of the economic cycle is marked by poor sales and pessimism for the automotive sector.

Second order factors such as the rate of falling growth are moderating. Sentiment-wise, this is a difficult time to make investments in the economy that depends on economic growth. These types of stocks have severely weakened.

The automotive sector is dependent on economic growth, credit conditions and consumer confidence. In a recession, all of these have been battered. This environment is what investors talk about when they say, "Buy when there is blood on the streets." When people are feeling uncertain about their job prospects or the future, they are not going to make a major purchase such as an automobile unless it is absolutely necessary.

These horrible conditions create opportunity for investors in the automotive sector. Prices are cheap due to the poor performance and sentiment. No one is in the mood for risk.

Bond investors find high yields. Stock investors find stock prices that are down significantly from their highs, with some even having declared bankruptcy.

Automakers tend to have high debt loads. This exacerbates any upturn or downturn due to leverage. So far in history, every recession has been followed by a recovery, a period of growth in which losses are made up and the economy normalizes to a new normal. Automakers do very well in this environment.

In most places around the world, automobiles remain necessary for a certain standard of living. The automotive sector is one of the first groups to recover after a period in which car sales are down. People who have put off purchasing a car during the recession come in as the economy improves, once they are feeling more confident.

During recessions, central banks loosen money. The automakers' borrowing costs decline, and these savings flow straight to the bottom line. Interest rates are cut, which lowers the payments to buy a car.

Central bank policy can stimulate the financial economy, which has marginal benefits for the automotive sector. However, it cannot fix the real economy. However, an improvement in the real economy, coupled with the lower interest rates, can fuel rapid changes in the fortunes of the automakers.

March 2009 is an example of an ideal time to invest in the automotive sector. The Federal Reserve had loosened money with interest rates at 0%. The economy had been in a serious recession, which was threatening to turn into a depression. However, there were some signs of increasing risk and improvement, which were dubbed "green shoots."

At that time, Ford's stock price was $5.75. Six years later, as the economy improved with auto sales fully recovered, Ford's stock price was $16.48. This illustrates the benefits of investing in the automotive sector when the economy is in a recession with low interest rates.

  1. Why should an investor add exposure to the automotive sector to his or her portfolio?

    Learn more about what automotive manufacturers offer investors. Explore possible investments in automakers, auto parts manufacturers ... Read Answer >>
  2. What are the primary risks to understand when investing in the automotive sector?

    Learn more about the automotive industry and the risks presented to investors. Find out how the auto industry has changed ... Read Answer >>
  3. What is the average return on equity for a company in the automotive sector?

    Discover the average return on equity, or ROE, for companies in the automotive sector and the importance of ROE as an equity ... Read Answer >>
  4. What techniques are most useful for hedging exposure to the automotive sector?

    Learn how investing in noncyclical and counter-cyclical sectors helps investors hedge against exposure to automotive and ... Read Answer >>
  5. What developed countries have the greatest exposure to the automotive sector?

    Learn about the developed countries that have the greatest exposure to the automotive sector, Germany and Japan, which have ... Read Answer >>
  6. How does the risk of investing in the automotive sector compare to the broader market?

    Learn how investing in the automotive sector compares in risk to investing in the broader market and how diversification ... Read Answer >>
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