Auto Stocks Fail to Rally in Record-Breaking Market, Hindered by Tariffs

Despite the stock market experiencing a record-breaking rally this month, automobile stocks have been left behind due to tariff-related issues. There are also projections that third-quarter earnings will fall short of market expectations, suggesting a sluggish trend may continue for some time.

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According to the Korea Exchange on September 30, Hyundai Motor Company fell by 2.27% this month, while Kia dropped by 4.82%. During the same period, the KOSPI index rose by 7.7%.

Foreign and institutional investors' selling pressure dragged down share prices. This month, foreign investors recorded net sales of 136 billion won for Kia and 66.9 billion won for Hyundai Motor Company. Institutional investors sold 177.9 billion won worth of Hyundai Motor Company shares and 124 billion won worth of Kia shares.

Tariffs are cited as the main reason for the weak stock performance. Previously, South Korea and the United States agreed to lower automobile tariffs from 25% to 15%. However, the follow-up negotiations have stalled, and South Korea continues to face a 25% tariff.

Kim Gwiyeon, a researcher at Daishin Securities, analyzed, "Ongoing policy uncertainties under a potential second Trump administration, including issues such as tariffs and visas, as well as domestic labor union issues, are causing continued weakness and valuation discounts in the sector. While the valuation remains attractive, we cannot rule out the possibility of increased risks due to delays in signing the tariff agreement, and the earnings momentum for the third quarter is expected to be limited. It is a time that calls for both calm and passion, depending on the situation."

There are forecasts that third-quarter earnings will fall short of expectations due to the impact of tariffs. According to financial information provider FnGuide, the third-quarter consensus (average analyst forecast) for Hyundai Motor Company is sales of 44.6872 trillion won, up 4.10% year-on-year, and operating profit of 2.6876 trillion won, down 24.95%. For Kia, third-quarter sales are expected to rise 4.25% to 27.6483 trillion won, with operating profit declining 15.89% to 2.4235 trillion won.

Kim Changho, a researcher at Korea Investment & Securities, predicted, "Due to the continued 25% tariff rate, expanded tariff costs are expected to result in generally weak third-quarter earnings for automakers and parts suppliers. While no company is expected to significantly exceed consensus, both Hyundai Motor Company and Kia are projected to fall short of consensus due to increased tariff costs and higher warranty expenses caused by a weaker year-end exchange rate."

There are also projections that if the 25% tariff is maintained, the decline in earnings will continue through the second quarter of next year. Researcher Kim Gwiyeon explained, "Given that the full impact of the 25% tariff rate will be reflected in the third quarter due to delays in signing, and considering the possibility that tariffs will remain unchanged due to difficulties in Korea-US negotiations, we have revised our estimates based on a 25% tariff rate. Additionally, we have factored in the assumption that Hyundai Motor Company and Kia will face challenges in reducing incentives due to the 15% tariffs imposed by the European Union and Japan. As a result, the annual impact of tariffs is estimated at 5.5 trillion won for Hyundai Motor Company and 3.2 trillion won for Kia." He added, "If the 25% tariff is maintained, both Hyundai Motor Company and Kia will inevitably see year-on-year earnings declines through the second quarter of next year. In particular, operating margins in the fourth quarter of this year are expected to bottom out at 3.5% for Hyundai Motor Company (automotive division) and 6.1% for Kia."

If the tariff shackles holding back automobile stocks are lifted, there is significant potential for share price gains. Researcher Kim Gwiyeon stated, "If a Korea-US tariff agreement is signed, we expect a short-term upward revision of earnings estimates and a narrowing of the valuation discount relative to the market. If the tariff rate is reduced from 25% to 15%, we project that this year's operating profit estimates for Hyundai Motor Company and Kia will rise by 1.3 trillion won and 810 billion won, respectively. This represents an increase of 11% for Hyundai Motor Company and 9% for Kia compared to previous estimates. Given that the stocks have remained undervalued due to tariff uncertainties, the signing of a tariff agreement could expand the short-term share price upside potential for Hyundai Motor Company and Kia by more than 10%."

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