European auto stocks have struggled in 2025, falling 2% compared to a 15% rise in the general market. BMW and Renault are seen as strong investment opportunities within the sector. The European companies are set to expand their EV product range starting in 2027, enhancing their competitiveness against Chinese rivals.

Morningstar believes that European carmakers like Mercedes and BMW can match Chinese brands in EV technology with new software-defined vehicles. Cheaper battery costs and regulatory support for EVs will help European automakers compete on price and offer more affordable electric vehicles in the future.

European automakers are expected to offer a wider range of EVs by 2027, using advanced software and high-voltage systems. This move will help them penetrate the Chinese EV market and stabilize their market share. BMW and Mercedes are poised to benefit from improved consumer sentiment and reduced costs.

BMW and Renault are top picks in the European automotive sector, with BMW leading in quality and regional positioning, while Renault offers a deeply discounted value play. Volkswagen ranks lower due to poor governance issues. BMW’s solid sales momentum in Q3 was overshadowed by a downgrade in full-year guidance, leading to a reduced fair value estimate.

Renault has seen improved profit margins under a transformational CEO, but faces challenges as a new CEO takes over. The company plans to reduce its stake in Nissan to release capital and improve its balance sheet. Morningstar forecasts Renault’s margins will return to industry averages, despite recent improvements.

Read more at Morningstar: Top Picks Among Undervalued European Automotive Stocks