Morgan Stanley's recent analysis of the European auto industry highlights a recurring pattern tied to energy shocks: suppliers typically bear the brunt of downturns yet register the largest relative gains once conditions stabilize. The firm's note was published against a market backdrop in which the European auto sector (STOXX:SXAP) rose 6% after news of a US-Iran two-week ceasefire that is conditional on the reopening of the Strait of Hormuz.
Markets responded to the ceasefire reports with lower oil prices overnight, as investors priced in the prospect of milder macroeconomic and geopolitical stress. That repricing reduced concerns about higher inflation and further interest rate tightening. Morgan Stanley described broad-based strength across suppliers, tire manufacturers and original equipment manufacturers (OEMs) during the move.
The bank's sector-level diagnosis explains why suppliers often perform poorly during energy crises: they face diminished pricing power, weaker balance sheets, higher operating leverage and heightened sensitivity to cyclical production swings. Those structural disadvantages lead supplier stocks to underperform through the shock phase. According to Morgan Stanley, when a crisis resolves, suppliers typically unwind much of that underperformance and become the largest beneficiaries of the recovery.
Morgan Stanley contrasts suppliers with OEMs and tire makers. OEMs generally have greater pricing power than suppliers but do not exhibit the same defensive characteristics as tire manufacturers. Tire makers, the bank notes, tend to be relatively defensive because a significant portion of their revenue is linked to replacement demand, which cushions them from new-vehicle cyclicality. Despite this defensive profile, Morgan Stanley observes that tire stocks frequently participate in market recoveries and can rebound strongly after downturns.
The analysis flags one notable exception: the Russia-Ukraine crisis. In that episode, extreme input-cost inflation and supply disruptions overwhelmed usual dynamics, prompting tire underperformance even though pricing pass-through eventually occurred.
On the current episode, Morgan Stanley points out that share-price downside so far has been modest compared with historical precedents, with a shallower drawdown and a less pronounced de-rating. The bank issues a cautionary note for investors: history suggests that initial market reactions to energy shocks can understate their eventual impact, particularly if oil prices remain elevated for an extended period.
Market implications
- Short-term relief in oil and geopolitical risk can lift multiple segments of the auto supply chain simultaneously - suppliers, tire makers and OEMs.
- Structural differences in pricing power and demand exposure shape which subsectors are most volatile during shocks and most rewarded in recoveries.