Looking beyond supply-chain disruptions within the automotive industry, parts suppliers appear well-positioned as production headwinds abate and order backlog remains elevated, points out Fidelity’s Hiroki Sugihara.
“These headwinds, which started with semiconductor shortages in late 2020, incrementally worsened in early 2022 amid Russia’s invasion of Ukraine and additional COVID-related lockdowns in China,” says Sugihara, portfolio manager of Fidelity® Select Automotive Portfolio (FSAVX).
In fact, he highlights that some raw materials crucial to auto manufacturing became less available, given that they were predominantly procured from Russia. Elsewhere, renewed lockdowns in Shanghai halted production lines of many automakers because several key suppliers are based in the vicinity of China’s biggest city.
In managing the fund, Sugihara favors high-quality businesses exhibiting above-average growth due to a strong electric vehicle portfolio; a robust geographic sales mix; suppliers with growing content per vehicle that are outpacing their competitors; and companies that are repurchasing shares, thereby accelerating earnings-per-share growth.
Despite the challenging backdrop, he has finally started to see some improvement in supply chains. Case in point, severe supply disruptions from major citywide lockdowns in China appear to be mostly behind us.
Additionally, Sugihara notes that some chipmakers increased automotive semiconductor production, which he thinks could finally help vehicle manufacturers catch up.
Furthermore, demand for autos remains high in many regions of the world, including North America. “Therefore, when manufacturers’ production normalizes, it should be met with heightened demand, leading to a sequential increase in auto production moving forward, barring any new supply-chain disruption,” he adds.
Shifting gears, this scenario also favors auto-parts suppliers, which historically benefit during periods of rising automotive production because their profit margins are highly sensitive to production volume, Sugihara highlights.
“As validation, I’ve been hearing positive updates from these businesses on gradually being able to pass along much of their cost increases to customers via higher pricing, which had previously weighed on profitability,” contends Sugihara.
For these reasons, he has recently boosted the fund’s exposure to auto parts and equipment stocks—including Japan’s Denso (DNZOY) and Irish American firm Aptiv (APTV), sizable holdings as of December 31—amid expectations for margin expansion and valuation re-rating within this space.
For specific fund information, including full holdings, please click on the fund trading symbol above.
Next steps to consider
Research mutual funds
Get fund picks from Fidelity or independent experts.
Explore our fund offerings
See the range of available Fidelity Funds and learn the benefits of each asset class.
More from our portfolio managers
A collection of current insights from our portfolio managers.
Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.
Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.
As with all your investments through Fidelity, you must make your own determination whether an investment in any particular security or securities is consistent with your investment objectives, risk tolerance, financial situation, and evaluation of the security. Fidelity is not recommending or endorsing this investment by making it available to its customers.
Past performance is no guarantee of future results.
Views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917