* European auto sector up 11 pct despite sagging car sales
* Hedge funds, analysts bearish before Fiat, Peugeot results
* StarMine shows scope for earnings forecast misses
* Forecast-beating earnings could extend rally
By Francesco Canepa
LONDON, July 29 (Reuters) - European automakers’ strong rally could run out of road if hedge funds and analysts are right with their negative bets on France’s Peugeot and Italy’s Fiat.
The sector has jumped 11 percent for the year so far, as measured by the STOXX Europe 600 automobiles and parts sector , even though European car sales sank to a 20-year low in the first half of 2013.
Analysts say the rally is based on assumptions sales can only rise from here and was exacerbated by abundant central bank liquidity seeking a home in some of the cheaper equity sectors.
However, speculative investors such as hedge funds remain unconvinced: shares in Peugeot and Fiat are among the most “shorted” in the region, with 11.3 percent and 9.5 percent of their outstanding shares out on loan, compared to a market average of around 2.3 percent, according to data group Markit.
Short sellers borrow a security and sell it, betting they will be able to buy it back at a lower price before returning it to the lender, bagging the difference.
These speculative sellers, which include hedge funds Odey Asset Management and Marshall Wace, will find out whether their strategy was a winner when Fiat reports results on July 30, and Peugeot the next day.
“Given the share price action so far this year expectations are very very high, so I would argue it’s probably very hard to beat expectations, which are at a very elevated level already,” Stephen Reitman, an analyst at Societe Generale, said.
“Baked into both share prices is the expectation that Europe has bottomed and things can only get better and I think that’s a rather dangerous assumption.”
Data from Thomson Reuters StarMine, which compares forecasts from the most timely and accurate analysts against the market consensus suggests Fiat’s second-quarter earnings could miss expectations by 10.7 percent.
A quarterly breakdown is not available for Peugeot, which is, however, expected to undershoot expectations for 2013 by 4.5 percent. And analysts are turning more negative on the sector as a whole, with SmartEstimates forecasts cut by 1.6 percent over the past 90 days.
But if the hedge funds and the SmartEstimates forecasts are wrong, and the results meet or beat the consensus, the short positions may have to be closed, leading to an accelerated move higher in the share price in a so-called “short squeeze”.
Fiat’s quarterly numbers should benefit from its stake in Chrysler, which reported an 8 percent increase in U.S. sales in June.
Peugeot, meanwhile, has been boosted by speculation the Peugeot founding family has offered to give up control of the group to revive plans for a closer tie-up with U.S. carmaker General Motors.
“European motors (stocks) continually defy odds,” Andy Ash, head of sales at Monument Securities, said. “It is astonishing how they tend to get people squeezed out.”
Traders said some Fiat investors have already started to factor in Chrysler’s stronger numbers and speculation the Italian car maker will soon receive the all-clear to acquire the 41.5 percent in the U.S. group it does not already own.
The stock is up 16 percent this month while the share of Fiat shares out on loan of those available to be borrowed - the utilisation rate - is down from 33 percent to around 28 percent.
Peugeot’s utilisation rate also fell, from 72 percent to 65 percent, while its share price rose 33 percent. (Editing by Nigel Stephenson)