Investing.com -- Morgan Stanley has upgraded Volkswagen (ETR: VOWG_p ) to Equal-weight from Underweight, while downgrading Renault (EPA: RENA ) to Equal-weight from Overweight in a note Friday, citing shifting tariff dynamics and evolving competitive pressures in the European auto sector.

Volkswagen’s challenges remain well known, but Morgan Stanley now sees a pathway to value creation.

“Volkswagen faces numerous challenges, reflected in the lowest multiples in the sector, but also opportunities to create shareholder value by reducing the cost structure and, in particular, becoming more asset-light,” the analysts wrote.

The bank pointed to recent moves by VW, including a December initiative, as early signs of progress. “We see today’s geopolitical backdrop as an opportunity to move further in that direction, involving unions and additional support from [the] German government,” they added.

Conversely, Morgan Stanley said it sees limited upside for Renault following a strong run of outperformance.

“Renault has been a safe haven in the past year, the only company to expand margins in 2024, and not exposed to China and the US,” the note said.

However, the firm believes this strength is now priced in. It added, “That may mean that this is a peak year for margins,” given Renault’s vulnerability to expanding Chinese OEMs in Europe and the rest of the world.

While Morgan Stanley acknowledged Renault could find “value-generative JVs with Chinese OEMs,” it warned that any reduction in tariffs on Chinese electric vehicles could disproportionately benefit German automakers over Renault.

The firm maintained its sector rating at In-Line but noted tariff policy as a key swing factor.

“We are still expecting a cyclical trough by mid-2025, but at a lower level as we factor 10% tariffs into our base case,” Morgan Stanley wrote.

A more severe 25% tariff scenario could “move margins lower for longer,” though outcomes remain fluid. Mercedes-Benz (OTC: MBGAF ) Group remains the firm’s top pick.