From CityWire

The rapidly developing car market has been a popular investment theme with many renowned fund managers recently, such as selector favourites Nicolas Walewski and Eric Bendahan.

However, Fraser Lundie of Hermes Investment Management is steering clear, even though he is well aware of the sector’s recent recovery.

‘The US automotive sector has shifted up through the gears since the 2008 financial crisis. Seasonally-adjusted annual sales of new cars and light trucks reached a peak of 17.6 million in 2016, higher than the 16.2 million recorded in 2007 and 10.4 million as the crisis unfolded in 2009.

AAA-rated Lundie, who manages the Hermes Global High Yield Credit and Hermes Multi-Strategy Credit funds, says macro conditions also helped fuel the recovery, enabling auto-makers to offer financing to potential buyers at low-interest rates over longer time periods.

‘Immediately after the crisis, the proportion of vehicles bought through finance was in the mid-70% range, but today it stands at 85%.’

Nevertheless, Lundie says the road ahead isn’t downhill all the way.

‘Vehicle sales in the US are actually slowing. Volumes may have exceeded 17 million again in 2017 and in early 2018, but growth has decelerated. Discounts, on average, have exceeded 10% of manufacturer-recommended sale prices in the last 20 months, a figure considered high enough to affect resale values.

‘The aggressive discount incentives provided by automakers have gone so far it is now difficult to increase them further,’ he says.

In addition, Lundie sees further bumps on the highway when it comes to positioning in the space.

‘The popularity of vehicle leasing in recent years will lead to a glut of used cars on the US market as leases end in 2018-19. This additional supply will depress values in the used car market, as the monthly cost of taking out a lease will have to rise to compensate for higher expected depreciation.

‘Another worry is credit terms, which have started to worsen and could deteriorate further if US interest rates continue to rise.

‘Groups displaying weaker balance sheets and lower geographic diversification will clearly be more impacted by a slowdown in US new car sales,’ he says.


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