The European automotive sector is expected to face a challenging year in 2025, according to UBS.
UBS has revised its recommendations for key players in the industry, including Forvia and Valeo, due to a confluence of pressures that could significantly impact earnings.
These pressures include price pressures, market share losses in China, stringent CO2 emissions regulations, potential tariffs, and weak demand.
UBS predicts that production in the sector, excluding Chinese manufacturers, will decline by 1% year-on-year.
As a result, UBS has downgraded its advice on Forvia and Valeo from "buy" to "neutral."
The bank believes that the market has not fully accounted for the risks ahead, despite valuations being 30% below historical averages.
UBS advises investors to "avoid most" automotive suppliers due to a lack of volume growth and uncertainty regarding original equipment manufacturer (OEM) production schedules.
The bank warns that strong cost pressures will keep profit margins low for equipment manufacturers.
While UBS maintains a "buy" recommendation for Stellantis, it has adopted a more cautious approach towards Renault.
UBS projects a slight improvement in Valeo's operating margin in 2025, but cautions that the market has not sufficiently considered the risks associated with production schedule volatility among automakers.
Forvia is particularly vulnerable to automakers' restructuring measures due to its significant industrial presence in Europe and reliance on Volkswagen.
The company's financial flexibility is limited, leaving little room for maneuver in the event of unforeseen circumstances.
Leadership changes are also on the horizon, with Martin Fischer set to succeed Patrick Koller as Forvia's CEO starting March 1, 2025.
Overall, the automotive sector faces a complex future with financial pressures and market uncertainties.