Car wars

Like many commuters, my partner and I have a “station” car. In our case it’s my partner’s beloved 10-year-old red Mini Cooper. Tracey, my partner, loves it – I hate it.

It’s heavy on the steering, the air-con doesn’t work and it’s continuously tuned to Vanessa Feltz in the morning. Warning lights flash off and on with a regularity bordering on disturbing. Lately, we have been umming and ahhing about replacing it for a new station car.

Despite my hatred for this abomination of an automobile, I am reluctant to replace it just yet. Why?

Being a multi-asset manager, I like to buy things when a brand or industry becomes so toxic that people are desperate to sell anything linked to it, regardless of quality. I love bargains, and that situation is like a repo auction in heaven. And I think I can smell one coming.

You see, I own a new Audi TT (third mid-life crisis) which I purchased, like most people these days, via a Purchase Contract Agreement (PCP) – secured credit by another name. PCPs let you lease a car for much cheaper monthly payments than if you borrowed to buy it outright. At the end of the term, usually three years, you have the right to buy the car using a balloon payment at a pre-agreed price (the sticker price less depreciation) or you can just walk away.

Now, these deals are designed to encourage punters to trade in (trade up) their car. Car manufacturers have an obvious incentive to lock customers into buying the next model to roll out of their factories. They do this by setting depreciation at a slightly more aggressive level than the market. That way, when you come to the end of the term the car is worth slightly more than the balloon payment. Now you have “equity” on the table that you can put towards a deposit on your next set of wheels. If you walk away, however, you lose that “equity”.

Many people have seen this as a great deal. Increasingly, this is the go-to transaction for funding new car purchases. In 2015/16, 76% of all new UK private car sales used PCP finance, according to information services group Experian. Between 2009 and 2016, total household auto debt almost trebled to more than £30bn. And the car companies make good money so long as that residual value of the traded-in cars is in positive “equity”. Or, put another way, if the value of the car on their books is below that of the prevailing second-hand market price.

But what happens if there is a glut of used cars during a recession or when consumers are feeling more subdued? In the five years to 2016, the value of used cars on sales forecourts jumped 46% to £23.4bn. What if more people decide to hand the keys back rather than pay the balloon payment or trade in for a new car? Prices will fall and auto finance companies have suddenly got loans secured on assets worth less than the value of the loans. Sound like sub-prime property to anybody?

The result would be a fire-sale of used cars. Yes please, I will be a buyer.

This scenario is not extreme. I have not even thought about second-hand values for diesel-powered cars as taxes rise or, indeed, petrol-powered vehicles as electric becomes mainstream. These issues have huge ramifications for the share prices of companies throughout the automotive value chain, as well as the bond prices for those companies exposed to the financing of PCP agreements.

The auto industry is obviously going through a huge transformation, driven by political and technological factors, over and above the normal cyclicality of demand. Any exposure needs to be judicious. We are looking to invest in the beneficiaries of these structural changes and avoiding those that appear slow to adapt.

Caution is needed even in the exciting new areas as hype is always evident.

For now, I am still driving the Mini, but I may be rocking up to an Arthur Daley forecourt relatively soon to buy a low-mileage star-buy of the week. If it’s down to me, it won’t be a Mini. So it will be!

Important legal information

This area of the site is for professional advisers

Please read this page before proceeding, it explains certain legal and regulatory restrictions applicable to the distribution of this information. It is your responsibility to inform yourselves of and to observe all applicable laws and regulations of the relevant jurisdiction.

This section of the website is directed only at investment advisers and other financial intermediaries who are authorised and regulated by the Financial Conduct Authority (FCA).

The information provided in this site is directed at UK investment advisers only and must not be circulated to private clients or to the general public. It does not constitute an offer to sell, or solicit an offer to purchase any investments by anyone in any jurisdiction in which such offer or solicitation is not authorised or in which a member of the Rathbone Group is not authorised to do so.

I confirm that I am an investment intermediary authorised and regulated by the Financial Conduct Authority. I have read and understood the legal information and risk warnings below:

Important Information (Terms and Conditions)

The information contained on this site is believed to be accurate at the date of publication but no warranty of accuracy is given and the information is subject to change without notice. Any opinions or estimates included herein constitute a judgement as of the date of publication and are subject to change without notice. Furthermore, no responsibility is accepted for the accuracy of any information contained within sites provided by third parties that may have links to or from our pages.

Rathbone Investment Management Limited ("RIM") is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered Office: Port of Liverpool Building, Pier Head, Liverpool L3 1NW. Registered in England No 01448919.

In accordance with regulations, all electronic communications and telephone calls between Rathbones and its clients are recorded and stored for a minimum period of six months.

The information provided in this site is directed at UK investors only. It does not constitute an offer to sell, or solicit an offer to purchase any investments by anyone in any jurisdiction in which such offer or solicitation is not authorised or in which a member of the Rathbone Group is not authorised to do so.

In particular, the information herein is not for distribution and does not constitute an offer to sell or the solicitation of any offer to buy any securities in France and the United States of America to or for the benefit of United States persons (being resident in the United States of America or partnerships or corporations organised under the laws of the United States of America or any state, territory or possession thereof).

In order to comply with money laundering and other regulations, additional documentation for identification purposes may be required.

Rathbones shall have no liability for any data transmission errors such as data loss, damage or alteration of any kind including, but not limited to, any direct, indirect or consequential damage arising out of the use of services provided or referred to in this website.

Past performance should not be seen as an indication of future performance.

The value of investments and the income from them can fall as well as rise and you may not get back the amount originally invested, particularly if your client does not continue with the investment over the longer term.

Changes in the rate of exchange between currencies may cause the value of an investment to go up or down.

Interest rate fluctuations are likely to affect the capital value of investments within bond funds. When long term interest rates rise the capital value of units is likely to fall and vice versa. The effect will be more apparent on funds that invest significantly in long dated securities. The value of capital and income will fluctuate as interest rates and credit ratings of the issuing companies change.

Tax levels and reliefs are those currently applicable and may change and the value of any tax advantage will depend on individual circumstances.

Investing in emerging markets or small companies may be potentially volatile, as these investments are high risk.

The design, text and images are owned, except as expressly stated by members of the Rathbone Group. They may not be copied, transmitted, displayed, performed, distributed, licensed, altered, framed, stored or otherwise used in whole or in part or in any manner without the written consent of Rathbones except to the extent permitted and under the procedures specified in the copyright Designs and Patents Act 1988, as amended and then only with notices of Rathbones' rights.

Rate this page:
Average: 5 (1 vote)