This week on BRIIDGE Recaps
23 JULY 2024
In the battle between short and long-duration assets, a broad spectrum of market returns for assets within the same industry [assuming no major idiosyncratic discrepancies] over a medium time horizon may highlight the differential impact of interest rate moves between newcomers and established businesses.
One illustrative case is the spread between long and short-duration assets in the auto manufacturing industry. Over the past three years, while the equal-weight index dropped by 50%, newcomers such as Lucid, Nio, and Rivian each lost at least 80% of their market cap. In contrast, established firms such as Ferrari, Stellantis, and Mercedes-Benz all outperformed the market during the same period.
Fig 1: Performance 1YR Horizon
BRIIDGE Shortcut: TS Reference Index
Fig 2: Sales Growth [1YR Rolling]
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As market participants prepare for an easing cycle, can such a spread present an opportunity in the medium term?
At the height of the speculative frenzy following the pandemic, consumer and investor appetite for cyclical goods reached historic levels.
This was fueled by excess savings, low financing rates, government stimulus, and, in the electric vehicles segment, optimistic forecasts for demand evolution and a desire to reduce carbon emissions among early adopters.
However, as the tightening cycle began to combat inflation, tailwinds turned into headwinds. Monetary policy negatively impacted long-duration assets (characterized by fast growth rates and negative margins) such as NIO, Lucid, and Rivian, as investors shifted from seeking long-term investment prospects to favoring short-duration assets (profitable firms with positive margins and dividends).
Lofty valuations [evidenced by median P/E ratios being three times historic figures in 2021] and skyrocketing financing rates across the board led to a progressive deterioration of fundamentals [a continuous mismatch between expected sales growth and growing operating expenses], precipitating valuation contraction.
Fig 3: Operating Margin [1YR Rolling]
BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA
Fig 4: Free-Cash-Flow To Sales [1YR Rolling]
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For established firms, however, the impact was less severe. For instance, Stellantis, Mercedes-Benz, and Ferrari maintained flat margins over the past three years, unlike their long-duration counterparts. This resilience is attributed to brand awareness, operational excellence, and decades of experience navigating tightening cycles.
With the current spread between the two themes exceeding 100%, a resurgence in momentum for electric vehicles and a global monetary easing cycle in sight, an investment opportunity may emerge. However, one could argue that in the event of a widespread economic slowdown, further spread widening may occur as investors initially liquidate non-performing assets.
Fig 5: Net Income Margin [1YR Rolling]
BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA
Fig 6: Performance [1YR]
BRIIDGE Shortcut: TS Reference Index
Fig 7: Dividend Yield
BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA
Fig 8: Net Debt To Ebitda [1YR Rolling]
BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA