Steering through tariff turbulence as auto stocks fall in the crosshairs

Imagine the auto industry as a finely tuned engine. Then picture a wrench being thrown into its gears. That's how Fidelity's Amy Ge describes the potential implications of tariffs on the industry.

• Recently announced tariffs on imported passenger vehicles, light trucks and parts are a real concern for automotive businesses and consumers alike, according to Fidelity Portfolio Manager Amy Ge, who believes the financial impact will heavily depend on the location of these companies.
• "The auto industry is at a crossroads, with tariffs acting as a potential roadblock," says Ge, who manages Fidelity^® Select Automotive Portfolio. "As such, I have positioned the portfolio more defensively, given this looming uncertainty, and will continue to closely monitor tariff-related dynamics while remaining alert for firms that seem likely to benefit."
• In managing the industry-based, equity-focused strategy, Ge invests in companies exhibiting above-average growth due to a strong geographic sales mix; suppliers with growing content per vehicle that is outpacing underlying production; and firms that are repurchasing shares, thereby potentially accelerating earnings-per-share growth.
• In the current environment, she is looking to the past as she manages the fund through a rough patch of road for the industry.
• "History has a way of leaving breadcrumbs, and we need only to look back to the 2018–2020 trade war that eventually concluded with an agreement with China," explains Ge. "Those two years were a roller coaster for auto manufacturers, as well as suppliers, but companies that braved the ride learned that transformation is possible with smart planning."
• One of the key determinants of the longer-term impact of the Trump administration's tariffs, in Ge's view, will be the duration of these duties, with the caveat that either ongoing negotiations among key trading partners and/or any protective measures enacted by the U.S. government could help alleviate pressure on the industry.
• "Many automotive stocks appear to be pricing in fairly short-lived tariffs," adds Ge. "On the other hand, the president has expressed a vision of a reindustrialized United States and bringing manufacturing jobs back to the U.S., which could create longer-term risks and opportunities for the automotive sector."
• Though the landscape is highly uncertain, Ge says she sees particular risk for what she deems the "Big Three" automakers – Ford, General Motors and Stellantis – as they anticipate significant supply-chain disruption and rising input costs, both of which stand to potentially squeeze these auto giants' profit margin.
• "The question in my mind is how much of the burden will manufacturers absorb, and how much will land on consumers?" Ge asks. "Unfortunately, I believe that no one will be completely immune from the tariff-related fallout. These challenges are likely to trickle down to the showroom floor in the form of higher sticker prices."
• Making matters worse for U.S. automakers and critical suppliers, according to Ge, is that most of them have shifted production operations to Mexico in recent years. She notes that GM's light-truck assembly plant is an example that is potentially at risk due to its reliance on cross-border production.
• By contrast, Ge points out that Tesla, with its manufacturing and sales largely confined to the same geographic markets, may be better insulated to weather the tariff storm. Interestingly, she says, the EV maker had plans to expand into Mexico, but a timely slowdown in sales put the brakes on that expansion.