Daily Gains Letter

The Sector That Continues to Benefit from Low Interest Rates

By for Daily Gains Letter |

Benefit from Low Interest RatesA sector that has truly benefited from the low-interest-rate environment over the last several years has been the automobile sector, which could now be an investment opportunity.

Armed with financing rates as low as zero or free money, car buyers have been rushing to the dealers looking for a new set of wheels.

Rising per-capita income levels around the world, especially in the emerging markets in China, Asia, and Latin America, have all combined to drive up demand.

Investment guru Warren Buffett just announced last week that his fund Berkshire Hathaway, Inc. (NYSE/BRK-A) would add a majority stake in Van Tuyl Group, which is the fifth largest auto dealership group in the country. Clearly, Buffett is positive on the auto sector as an investment opportunity.

The price chart of the S&P 500 Automobiles & Components Industry Group Index shows the recovery in the sector from mid-2012 to its peak in mid-2014, prior to the recent bout of selling that drove the index below its 50-day moving average (MA). Despite this, I continue to like the sector as a possible longer-term investment opportunity and would advise buying on weakness.

S&P 500 Automobiles & Components Industry Group Chart

Chart courtesy of www.StockCharts.com

In addition to the obvious low financing rates, the U.S. auto sector is on much better footing now as an investment opportunity than it was prior to the recession in 2008. After undergoing major structural changes over the past few years since the bankruptcy of General Motors Company (NYSE/GM) in June 2009, the sector has become more efficient and cost-conscious. It’s also more in tune with the needs of its customers, whether it’s through the development of more fuel-efficient vehicles or the more advanced technologies offered.

General Motors Company Chart

Chart courtesy of www.StockCharts.com

Of course, China helped to drive the recovery in the auto sector due to the superlative growth in the country, which has made China the biggest auto market in the world. The advent of newfound wealth in China has helped to drive the demand. And unlike the United States, American-made vehicles are held in high regard in China.

In September, auto sales were sizzling with General Motors and Chrysler Group LLC recording sales growth of 19.4% and 18.8%, respectively.

The annualized growth in September was 16.43 million vehicles, up from an annualized 15.43 million a year earlier, according to Autodata.

Looking ahead to 2015, the predictions look pretty good, especially as interest rates continue to fluctuate around one to two percent. This is what could make the auto sector an excellent investment opportunity.

As such, the investment opportunity may lie in the accumulation of some auto and auto-based stocks.

Auto companies have also found insatiable growth in foreign markets. Besides the importance of the Chinese auto market, auto sales in India are also seeing a surge as the country’s income levels rise. Many observers expect India to become the third largest auto market by 2015.

All of these fundamentals will continue to help drive the sector as an investment opportunity. Investors looking to get in on this possible long-term investment opportunity may want to consider a company like General Motors.

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