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Wednesday, April 06, 2022

Pair Trade: Auto -Stoxx European Automobile and Stoxx Europe 600

تم إعداد هذا المنشور من قبل سنشري للاستشارات

Pair Trade: Auto -Stoxx European Automobile and...
Pair Trade: Auto -Stoxx

* Trading in financial market carries risk and can result in loss of capital.
* This performance is only observed with historical backtests and not traded by the company.

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The product and investment ideas do not consider the risk profile and financial position of the recipient and may not be suitable for everyone. Trading in financial markets and use of margin involves a significant risk of loss, which can exceed deposits. Please read the complete disclaimer carefully.

Risks & Assumptions

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The structure is based on an options buying & selling strategy.
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Option prices and the corresponding payoff are as of expiry & for representative purposes only. Going ahead, as the stock price moves in either direction, the final payoffwill change accordingly.
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The assumption of receipt of the initial coupon or debit cost is based on the option premiums available at structure creation. This may vary at the actual execution time depending on the corresponding option prices and implied volatility.
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Numbers given below for the P & L are gross (without considering any transaction charges).
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Individual stocks in the basket are subject to both weightage recalculation & recomposition risk. As a result, certain stocks may be added or removed from the basket as per the platform provider purview without any advance notification. This may be specific to any individual stock or due to some sector specific event. Consequently, share basket performance may significantly deviate from the one specified below.
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It is important to note that trading pairs is not a risk-free strategy. The diffculty comes when prices of the two securities move contrary to the positions taken resulting in losses. Thus, it is important to adhere to strict risk management rules when dealing with such adverse situations.

Europe's Auto Sector has cheap valuations - Brace for a Rebound

The global semiconductor shortage have forced production cuts at the world's largest carmakers, with many seeing problems continuing in 2022. As a result, European car sales hit a record low in October 2021. It's not just sales that are flirting with lows; it's valuations too. At a 60% discount to the broader market, the Stoxx 600 Autos & Parts Index just traded near its lowest relative forward P/E ever and, at a multiple of 5.7 times, is Europe's cheapest sector by far in absolute terms. Moreover, it trades at a 20% discount to the long-term average book value.

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Source: Bloomberg
Date : 25th March 2022

Why the low valuations?

For more than a year, the global auto industry has struggled with a disastrous shortage of computer chips and other vital parts that have shrunk production and slowed deliveries. A new factor - Russia's war against Ukraine - has thrown up yet another obstacle. Critically important electrical wiring, made in Ukraine, is suddenly out of reach.

Chance for a turnaround

Concerns about the ongoing supply chain crunch are likely expected to come down in the second half of 2022. The damaging impact of the Russia-Ukraine war may be short-lived as harness makers are trying to shift production to Poland, Romania, Serbia, and possibly Morocco to reduce the impact of the disruption. Additionally, European Automobiles are setting up their base for electric vehicles to give tough competition to its American counterparts.

Sector Composition
Component Weighting
BMW 17.16%
Volkswagen (Preference) 16.94%
Mercedes- Benz Group AG (DE) 16.47%
Valeo 7.40%
Porche Autobomil Holding 7.30%
Renault 7.07%
Michelin 6.87%
Stellantis NV 6.87%
Faurecia 6.71%
Continental AG 4.90%
Vitesco Technologies Group 2.29%

Source: CMC Website
Date : 4th April 2022

EU automobiles are anticipated to ramp up production with 35 new vehicles due in 2022-23, giving tough competition in the luxury car segment. BMW, Mercedes, Stellantis, and VW are prioritizing battery and software development to boost their tech credentials and close the valuation gap vs. Tesla and pure-play BEV startups. The EU Automobile share basket's most significant component BMW, targets over a 10x increase in BEV sales by 2025 that will boost the company's EBIT and revenue numbers. Several productions in the pipeline are expected to improve their valuation figures that will reflect well in the stock for patient investors

Ratio Chart

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Source: Bloomberg
Date : 4th April 2022

The ratio between Stoxx 600 Autos and Parts (substitute for European Automobile Share basket) and Stoxx Europe 600 is currently trading at 1.27, and the anticipation is that the ratio will increase further on the notion that European Automobile will perform better than Europe 600.

Risks and Assumptions for Back-tested trading strategies
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The risks and assumptions listed here are not intended to be an exhaustive summary of all the risks and assumptions involved.
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The strategy might suffer from look-ahead bias which occurs due to the use of information or data in a study or simulation that would not have been known or available during the period being analyzed. This can lead to inaccurate results in the study or simulation.
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Future price movements may not be exactly the same as the historical price movements and this could lead to variation in performance.
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Testing can sometimes lead to over-optimization. This is a condition where performance results are tuned so high to the past they are no longer as accurate in the future.
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The model assumes no slippages in trading. Slippage refers to the difference between the expected price of a trade and the price at which the trade is actually executed.
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Drawdowns in actual trading can be higher than the tested system and losses could be significant in the event of leverage.
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Unforeseen events can lead to variation in performance from the tested trading strategy.
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The tested result has been computed with price feeds available from Bloomberg.
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The testing environment has not considered transaction or any other costs.
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Trading indicators used for the purpose of testing has been provided by Bloomberg.
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The strategy might suffer from data mining fallacy, selection bias and backfill bias.

Data Source: Bloomberg
Data & Prices as of: 06/04/2022

Arun Leslie John
Chief Market Analyst

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