Kicking the tyres of car finance

Auto sales have been on a tear of late. According to data from the European Automobile Manufacturers Association, new passenger car registrations in the European Union rose over 12% year-on-year in the first two months of 2017. In the UK, the story is similar. The Society of Motor Manufacturers & Traders (SMMT) says the number of new cars registered in March rose more than 8% against the previous year.

At first sight, this seems like great news for manufacturers and their associated sales, financing and distribution networks – but lift the bonnet and all may not be what it seems, at least if US data is anything to go by.

Against a backdrop of rising interest rates, the number of defaults on sub-prime car loans is beginning to rise. In March, ratings agency Standard & Poor’s highlighted how losses on US sub-prime auto loans reached an annualised 9.1% in January from 8.5% in December and 7.9% in the first month of 2016. The rate is the worst since January 2010 and is largely driven by worsening recoveries after borrowers default, S&P said.

We believe the looming crisis in car finance is part of a wider global malaise. Governments, companies and consumers have continued to take on more and more debt over the past decade with little regard for the long term consequences. The recent Trump-fuelled stock market rally was based partly on a belief that deregulation of the financial services sector would free-up banks and other credit providers to lend more – and that this in turn would result in a spending boom. But we believe the rise in auto loan delinquencies are just one indicator of how weak the foundations of that rally are.

Nick Clay, Newton, a BNY Mellon Company

Auto sales have been on a tear of late. According to data from the European Automobile Manufacturers Association, new passenger car registrations in the European Union rose over 12% year-on-year in the first two months of 2017. In the UK, the story is similar. The Society of Motor Manufacturers & Traders (SMMT) says the number of new cars registered in … read more

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Decoding the complex web of a Brexit trade deal

The lead EU negotiator, Michel Barnier, has indicated that negotiations on trade and other aspects will not commence until an agreement has been reached on the divorce and the free movement of people. Given the potentially fractious nature of these discussions and ensuing delays, this could result in the UK exiting the EU without a formal trade agreement in place or even without transition agreements that may need to last at least five years or more. Unsurprisingly, the UK wishes to pursue parallel negotiation streams, with trade negotiations progressing alongside other discussions.

The chief UK negotiator, David Davis, has prompted alarm in recent weeks by suggesting that the government did not have sufficiently detailed projections of the economic impact of leaving the EU without a formal trade agreement, reverting to trade under the Most Favoured Nation status of the World Trade Organisation. Nonetheless, he acknowledged that certain industries could face tariffs of 30-40% on exports to the EU under those circumstances and that financial firms would lose their ability to passport services to the EU. May has stated, “No deal is better than a bad deal,” a startlingly blithe approach in the absence of a comprehensive assessment of the impact and the likely implications for the UK economy.

Negotiations of this magnitude are typically slow and ponderous. To provide context to the scale of the complexities of the trade agreement negotiations alone, discussions on the recent Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada started in 2009 and concluded in August 2014 (although final ratification took a further two years, and did not occur until early 2017).

Sinead Colton and Jason Lejonvarn – Mellon Capital, a BNY Mellon company

The lead EU negotiator, Michel Barnier, has indicated that negotiations on trade and other aspects will not commence until an agreement has been reached on the divorce and the free movement of people. Given the potentially fractious nature of these discussions and ensuing delays, this could result in the UK exiting the EU without a formal trade agreement in place … read more

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Tracking Frexit fears: Overblown or underestimated?

Investors are on alert for French election risk. It’s a medley of scandal, gaffes, and general uncertainty which is spooking markets as polls show Marine Le Pen and Emmanuel Macron neck and neck in the first round of what is one of the most unusual French elections in modern history. French spreads are largely tracking Le Pen’s chances of securing the presidency.

The scenario may be unlikely, but it is not impossible for Marine Le Pen to win this election. We currently assign an 85% probability of Le Pen losing the presidency with our base case being that either Macron or Francois Fillon will take the presidency. Nevertheless, we consider the 15% alternative: Le Pen wins the French presidential election.

In the wake of her shock win, market volatility would surge. She may first call a European Summit and make nationalistic demands to the European Union (EU) but such demands would not likely be well received. While she has threatened a referendum on EU membership, support from the parliament would not likely legitimise any such vote. Even so, the threat of EU/eurozone breakup would be be quite real as the eurozone’s second largest economy and founding nation could stumble toward Frexit.

Therefore, a Le Pen victory would likely result in a spike in sovereign credit spreads across much of Europe, as negative sentiment spills over into vulnerable periphery markets.  On the other hand, if Macron or Fillon were to win, then we would expect French sovereign spreads to fall roughly 30 bps, as the expectation of economic reform would raise potential output growth.  Any spike in spreads is likely to present alpha opportunity in either France or related markets once the election outcome is known.

Rebecca Braeu – Standish, a BNY Mellon company

Investors are on alert for French election risk. It’s a medley of scandal, gaffes, and general uncertainty which is spooking markets as polls show Marine Le Pen and Emmanuel Macron neck and neck in the first round of what is one of the most unusual French elections in modern history. French spreads are largely tracking Le Pen’s chances of securing … read more

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Three charts revealing the investment potential of an EM gem

Demonetisation in India, whereby high denomination bank notes were withdrawn from circulation in November 2016 in order to clamp down on the black market, seems to have had far less impact than many commentators would have you believe. This is especially true for the formal part of the economy, which is where most listed companies are most exposed.

Prime Minister Modi’s economic reforms continue to impress, but he is playing the long game, which is less exciting for the short-term speculator. Broadly, we are seeing a cyclical recovery led by the consumer following a period of retrenchment. India is far earlier cycle than most economies and is not burdened by the past excesses of the West. Structural growth potential is supported by demographics, low household credit penetration, economic reforms and catch-up productivity.

Rob Marshall-Lee – Newton, a BNY Mellon company

  Demonetisation in India, whereby high denomination bank notes were withdrawn from circulation in November 2016 in order to clamp down on the black market, seems to have had far less impact than many commentators would have you believe. This is especially true for the formal part of the economy, which is where most listed companies are most exposed. Prime … read more

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