Morgan Stanley: EU auto suppliers outperform the market after the energy crisis

Investing.com - Morgan Stanley said car suppliers often perform better than the entire sector after an energy crisis, while tire makers—despite acting as a relatively safe haven during economic downturns—can also deliver a strong rebound. The company released this analysis on Tuesday, when the European automotive sector (STOXX:SXAP) rose 6% after news of the U.S.-Iran ceasefire agreement.

The U.S. agreed to a two-week ceasefire with Iran, contingent on the reopening of the Strait of Hormuz. With markets expecting improvements in macroeconomic conditions and geopolitical circumstances—reducing inflation and the risk of rate hikes—oil prices fell overnight. Suppliers, tire makers, and original equipment manufacturers all performed strongly.

Suppliers typically underperform during energy crises due to weaker pricing power, weaker balance sheets, higher operating leverage, and greater exposure to cyclical production volumes. Morgan Stanley’s analysis shows that once the crisis is resolved, supplier stocks often become the biggest beneficiaries, reversing the situation in which they previously lagged significantly. Original equipment manufacturers have stronger pricing power than suppliers, but less resilience than tire makers.

Tire makers remain relatively defensive because their exposure to replacement demand is higher, keeping their cycle lower than that of original equipment manufacturers and suppliers. Morgan Stanley noted that, surprisingly, tire stocks still participated in the recovery and often rebounded strongly after downturns. The Russia-Ukraine crisis is an exception, because extreme cost inflation and supply disruptions led to weak tire performance, even though price pass-through was eventually achieved.

Compared with historical precedents, the current crisis has led to relatively limited downside in share prices, with shallower drawdowns and less noticeable valuation downgrades. Morgan Stanley said investors should proceed cautiously, because history shows that the market’s initial reaction to energy shocks may underestimate the ultimate impact—especially if oil prices remain elevated for an extended period.

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