LONDON -- Investment bank Merrill Lynch said on Monday it had lowered its weighting for the European auto sector to "underweight" from "neutral" based on concerns over weak global consumer demand.
"We doubt policy makers can rescue U.S. consumption," said Merrill Lynch strategist Michael Hartnett. "And in the UK and euro zone, fiscal policies are inexplicably becoming more anti-consumer."
He said the European auto sector has outperformed the European markets in 2002 by seven percent.
"We expect this year's modest underperformance to accelerate from here," he added.
The bank said European auto stocks had notably outperformed their U.S. counterparts over the past three years and said retail stocks were 12 percent overvalued on a price to earnings basis.
"Lastly, earnings momentum should be expected to wane in coming months," the bank said.
It said earnings revisions for DaimlerChrysler and Fiat were already extremely weak.
Merrill Lynch said its favored picks in the sector were premium players including BMW and Porsche, both rated "buy".