Market commentary: Volkswagen diesel disaster

As the local market was closed for Independence Day, elsewhere in Europe markets experienced a choppy trading session on Monday, whilst US stocks managed to snap a positive session following last Friday negative closing.

The main news was evidently the stunning admission of Volkswagen AG that it has purposely and repeatedly cheated the US carbon emissions regulation by installing an emission control system that only worked during inspections, leaving its diesel models to often pollute between 10 to 40 times the legal limits.

To customers and investors alike, the statement sounded almost unbelievable coming from a German automaker which has built its brand’s reputation on relatability.

Although the latest scandal in the auto industry does not relate to any safety issue and does not put customers in immediate danger, it seems to point towards a deliberate and 6-year long fraud. In fact, it appears that VW introduced the faulty emissions control system back in 2009, and it has been selling models using it throughout the past 6 years, fully aware that the system was not only defective, but purposely deceiving regular mandatory car’s inspections.

What is more is that the German automaker has been prizing its emissions system and consequently it has consistently charged customers a premium on most of the diesel models in question because of the supposedly lower emissions, higher horse power and better fuel efficiency.

As of today, there are two different ongoing investigations, as consumers and consumers’ protection agencies are suing the German car maker for product misrepresentation and for having charged buyers a premium on fraudulent basis. On the other hand, US Regulators are looking into the scandal from a criminal perspective, as VW has deliberately infringed several environmental laws and, potentially, car safety requirements.

Although Volkswagen’s management has been trying its best to apologize to customers and to save the brand image and reputation, investors have not taken the scandal lightly and they started a full-blown sellout on the name, causing the stock to plunge to a multi-year low on Monday, with shares in the automaker dropping nearly 18% in one single trading session.

Although such a sudden pullback could potentially attract speculative buyers, most investors seems to be unwilling to take up the name’s huge uncertainty, pushing the stock to decline another 5.5% so far this morning.

As often happens in these cases, the selloff spilled over to the entire car sector, punishing the rest of European automakers, with Renault SA losing 3.18% on Monday and dropping another 5% this morning, Peugeot SA plunging over 6.5% today after closing 2.5% lower yesterday, and Fiat Chrysler Automobiles NV declining around 6.5% over the past two trading sessions.

While avoiding Volkswagen AG would be a wise strategy, the selloff affecting the rest of the industry is likely to provide investors with attractive entry points in other European car makers (assuming they have not engaged in any similar fraudulent activity), although caution is advisable as the lack of trust spurred by the fraudulent behavior of VW is going to negatively affect the entire industry for months to come.

Disclaimer:

This article was issued by Paolo Zonno, Trader/Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.