TOKYO -- Premier investment bank Goldman Sachs turned cautious on the Japanese car sector on Tuesday, saying slowing demand in the key U.S. market and a strong yen could hurt profits.
Goldman Sachs said there were growing signs the U.S. economy would slow even if a conflict in Iraq were short-lived, while demand would also weaken in Europe and Japan, boding ill for the sector since the developed world accounts for about 70 percent of global auto demand.
"We recommend auto-sector stock selection based on defensive earnings characteristics and valuation," it said in a report, lowering its view of the sector's fundamental outlook by two notches to "cautious" from "attractive".
But the brokerage upgraded its rating on Honda Motor Co. to "outperform" from "in-line", saying Japan's No. 2 auto maker was resistant to the risk of a slowdown in North American demand since sales had been hampered up to now by insufficient production capacity.
In contrast, it lowered Nissan Motor Co.'s rating to "in-line" from "outperform", saying it was more vulnerable to a fall in U.S. demand as it expands its product lineup there, notably with its entry into the full-size light truck segment in which sales could be dented by rising oil prices.
Citing Honda's comparatively low level of inventory and sales incentives in the U.S. -- at $140 per vehicle versus the industry average of $2,200 -- Goldman said Honda's profits were set to rise in the first half of the business year starting next month.
Meanwhile, first-half earnings at Nissan, Japan's third-largest carmaker, could fall year-on-year, it said, amid a rise in costs relating to its new $1.43 billion plant in Canton, Mississippi.
For the current business year ending on March 31, however, Goldman Sachs raised its operating profit forecast for Nissan to 748 billion yen ($6.3 billion) from 721 billion yen, mainly due to the impact of cost cuts. Nissan is expecting 720 billion yen.
The dollar, meanwhile, continues to pose a threat to earnings, having spent most of this year below 120 yen, which could eat into profits that Japanese auto makers earn from exports.