Auto sector stocks remained under pressure, dragging the market at times

How important is a kitchen in a household or an IT department to an organisation! It cannot function without it. Similarly, the automobile sector is a key driver for the economy. It is a huge engine that drives the stock market. Now if the kitchen slows down, simultaneously it will impact other parts of the household as well. Currently, the Auto Sector is stalling, its stocks are struggling. 

The automobile industry is a leading indicator of the economy which means it tells us about the onset of a business cycle. When people are buying cars, it indicates good finances. Accessing car loans from banks becomes easy due to lower interest rates and the industry also provides employment opportunities for millions of people in factories, part shops and dealerships. Now, if stock prices drop, it directly indicates lesser demand and unwillingness to buy more cars. 

You must have heard about the Domino Effect. It is when one small event triggers a chain reaction that knocks down everything else connected to it. A car isn’t just one product; it consists of thousands of parts. The raw materials used are- steel, aluminium, rubber, copper, glass, etc. If the demand for cars drop, consecutively it will affect the companies providing raw material for the same, banks who earn on car loans and the whole stock market becomes sluggish.

The 4 big reasons for the slump

• Post-pandemic of Covid-19 in 2020, everyone rushed to buy cars they couldn't afford during lockdowns. The hike in demand is now over and demand is returning to normal.
• Most of the people borrow money to buy a car. Increasing bank interest rates to finance a car is making the purchase more expensive. Hence, people move away from taking such decisions and stick to their old cars.
• The cost of the overall product (a car) is high because its raw material and subsequent parts are expensive. So, even if a company sells a car, it costs more to produce it, thereby shrinking their profits.
• The new shift towards EV (Electric Vehicle) driven economy, though a great idea for the Earth but are heavy on pockets. Hence, it is difficult for companies to revamp their factories.

Different segments of the automobile industry

Just like one size doesn't fit all; the needs, wants and demands are not the same for all. Hence, the market is divided into three segments-

• Cars and SUVs: These depend on city jobs and demand is for fancier models
• Bikes and Scooters- These rely on farmers and rural workers. Poor harvests lead to fewer bike sales
• Trucks and Buses- these depend on government spending for roads, bridges, etc.

What should investors do? 

If you’re watching the market, experts suggest: 

• Don't Panic: Markets go through cycles. This "pressure" is part of the process and won’t last forever. 
• Spread the Risk: Don’t invest all your money in car stocks. Diversify your portfolio, having some in Tech or Food companies can help balance the risk. 
• Think Long-Term: Look for companies with solid savings and smart leadership that can handle such alterations in the business cycle.

The automobile sector might be under pressure today, but it is still the backbone of the economy. The market forces are self clearing, once interest rates subside, the demand will automatically increase and the economy moves in full swing.