01:52 PM EDT, 03/13/2024 (MT Newswires) -- Automakers are now focusing more on capital efficiency and shareholder returns amid a slowdown in the electric vehicle market, with recent demand trends strongly in favor of the "higher-for-longer" internal combustion engine, or ICE, thesis, Morgan Stanley said Wednesday.

The firm upgraded its view on the US auto industry to attractive from in-line as automakers make the pivot following "years of peak spending" on electric and autonomous vehicles, according to a note. "The industry has attractive optionality to lower spending, increased collaboration and restructured portfolios," Morgan Stanley said. The brokerage sees a 10% upside to its price targets on average across its US autos coverage.

The firm said Ford Motor ( F ) is the brokerage's top pick in US autos for capital discipline and shareholder returns. Once one or two firms shift their focus from investing in battery plants and software -- and get rewarded for the move -- most other original equipment manufacturers are likely to follow suit, according to the note.

The brokerage said 2024 is emerging as a "good" fundamental year for autos, with "very good" strategic changes likely to occur. Investors are expected to "handsomely reward" companies that can responsibly remove capital from the industry, the firm said. "In a world of scarce capital and changing strategic priorities, we believe capital efficiency and cash return will be deterministic in driving share-price performance for 2024."

Tesla's (TSLA) slowing vehicle demand and profit warnings, along with continued core auto estimate revisions, have "implications" for the EV maker's global competitors and suppliers. "While EVs are the future, it's the ICE product that generates the profits and funds the dividends and buybacks while relatively insulated from Tesla and Chinese EV disruption," Morgan Stanley said.

The firm expects the EV startups under its coverage to confront slowing demand and capital headwinds, which would bring production and deliveries under pressure this year. Tesla's continued negative revisions are likely to ultimately trigger price hikes to protect margins, which would further impact volumes. Morgan Stanley said its "ICE is Nice" thesis provides "surprising ballast" to Ford and General Motors ( GM ) . "The majority of our US auto coverage is relatively 'short' the EV adoption curve, where a slowdown offers opportunity."

The firm continues to see investment opportunity in ICE-skewed suppliers such as PHINIA ( PHIN ) and American Axle & Manufacturing ( AXL ) . "While near-term EV pessimism is growing, particularly in the US, we still see room for longer-term expectations resetting as legacy OEMs dial back on future EV projects throughout 2024."

Morgan Stanley said it is particularly "cautious" on China's business tilted more towards the multinational OEMs and their respective joint ventures, compared with China domestics. The firm sees slower EV sales growth as a positive development for dealers. Morgan Stanley favors dealers like Group 1 Automotive ( GPI ) and AutoNation ( AN ) that have "outsized exposure" to Toyota Motor ( TM ) , as they are poised for market share gains this year, according to the note.

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