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Weaker China demand, regulation spell tough quarter for Europe's auto stocks: Goldman Sachs

Goldman Sachs analysts said slowing car demand in China and new fuel consumption regulations were hurting investors’ sentiment toward European autos stocks and warned this results season could be challenging, hitting shares in the sector on Wednesday.

Europe’s autos sector .SXAP is already down 6 percent this month and is on track for its worst year since 2011 as a global trade dispute drove investors to dump a sector vulnerable to higher tariffs threatened by the United States.

Goldman Sachs (GS) said weaker Chinese car demand and the cost of adapting to the European Union’s new WLTP (Worldwide harmonized Light vehicles Test Procedure) fuel consumption regulation were worrying clients, as well as weak Latin America production.

“Overall we see this as a challenging quarter for the sector, with potential for downward earnings revisions by suppliers,” GS analysts wrote in a note to clients, lowering their earnings estimates for auto supplier companies by 4 percent on average over 2018-22.

The downbeat note had dragged Europe’s autos sector .SXAP down 1.4 percent by 0956 GMT, making it the worst-performing sector.

France’s Peugeot (PEUP.PA) and Renault (RENA.PA) fell 2.9 and 2.7 percent respectively, while German carmakers Daimler (DAIGn.DE), BMW (BMWG.DE), and Volkswagen (VOWG_p.DE) fell 0.4 to 1 percent.

GS’s top picks are agricultural and construction vehicles firm CNH Industrial (CNHI.MI), tire maker Continental (CONG.DE), and fuel tank manufacturer TI Fluid (TIFS.L). It downgraded Michelin (MICP.PA) to “neutral” from “buy”.