UK Car Sales Not Yet Dented by Brexit

15/11/2016
UK Car Sales Not Yet Dented by Brexit

Summary

A new Grassroots Research study showed that Brexit’s immediate impact on UK car dealers wasn’t as bad as some industry experts feared. Still, nervousness is on the rise for the UK economy as a whole – and for the local automotive industry in particular.

Key takeaways

  • Average prices and lease rates of standard cars were essentially unchanged in the post-Brexit period
  • Most standard UK car dealers predict Brexit will have a negative impact on car pricing and lease rates in 2017; the premium market has been less affected
  • These results may indicate a limited risk of a near-term UK recession, as consumers don’t seem to be avoiding big-ticket items

In the wake of the UK’s historic Brexit referendum, GrassrootsSM Research conducted two studies to assess Brexit’s impact on UK car sales – a big-ticket bellwether of consumer confidence.

During September 2016, we asked UK dealers selling a variety of different car brands, from standard to luxury, to share their views on several key topics:

  • changes in year-over-year car sales for July-August;
  • shifts in car pricing, measuring actual transaction prices rather than list prices;
  • developing trends in the lease rates of cars to consumers; and
  • any broader Brexit-related correlations or business impact.

Our findings indicated that for the standard and less-expensive segment of car dealers, average new car prices and car lease rates were essentially unchanged in the post-Brexit period – though slightly less than two-thirds of respondents reported that new car orders moved down by single digits on average. These same auto dealers were cautious of the post-Brexit environment, anticipating an eventual downturn on their businesses.

The premium-car segment had a different post-Brexit experience. The same indicators about prices and lease rates moved up slightly for most of the dealers we interviewed. Respondents said that during the months after Brexit, they enjoyed good sales of higher-end models, which pushed up average prices, and they saw strong demand for lease contracts for higher-end models. It is also worth noting that UK premium car dealers in general did not think that Brexit was having much direct impact on customer sentiment.

Although the outcome of the negotiations between the EU and the UK is still to be determined, most standard UK car dealers believe Brexit will be bad for the UK economy and the local automotive industry in particular, and most predict a negative impact on car pricing and lease rates in 2017.

“This Grassroots study showed that two months after the June referendum, Brexit’s impact on the car market appeared to be surprisingly low,” said Ralf Stromeyer, AllianzGI’s research sector team head for the European consumer segment. “Although there was a moderate decline in the standard segment, the premium segment reported strong growth. The caveat is that this growth was at least partly driven by a strong fleet business, which manufacturers may use to reduce inventories. We could also be witnessing ‘pre-buying’ ahead of anticipated price increases, given the drop of the pound sterling. For now at least, we can state that the Brexit vote has not caused the shock to the car market that some industry participants feared. This also may indicate a limited risk of a near-term UK recession, as consumers do not seem to be put off from purchasing big-ticket items.”

After the Brexit Vote, UK Consumers Bought More Premium Cars
Orders of premium cars moved higher in the UK in July/August 2016 vs. one year earlier; standard-car orders moved slightly lower.

UK Car Sales Not Yet Dented by Brexit

Source: GrassrootsSM Research as at August 2016.

Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.

The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.

This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations.

This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424, Member of Japan Investment Advisers Association]; Allianz Global Investors Korea Ltd., licensed by the Korea Financial Services Commission; and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.

© 2016 Allianz Global Investors. All rights reserved.

Europe’s Big Banks: Well-Capitalized, But Not Profitable

18/11/2016
Europe’s Big Banks: Well-Capitalized, But Not Profitable

Summary

The European banking sector has come a long way since the 2008 crisis, largely thanks to the ECB. But restoring profitability will be a long-term effort, says Senior Credit Analyst Simon Outin, which could lead to a prolonged bout of heightened market instability.

Key takeaways

  • The sector’s issues mainly stem from decreasing revenues due to insufficient volumes and accelerating margin compression
  • The ECB has made large European banks better-capitalized and better-provisioned, but not more profitable
  • We expect market volatility to be the order of the day for the coming months – and possibly for years

The European banking sector is much stronger today than it was in 2008, at the beginning of the Great Financial Crisis. Indeed, since that time:

  • capital levels have more than doubled;
  • asset quality has materially improved;
  • new risk-averse management teams have restructured business activities; and
  • politicians have given regulatory and supervisory authorities more power than ever.

Still, something isn’t right in the European banking sector. For instance, returns on tangible equity are already below 10 per cent on an aggregate basis. In addition, market consensus points to lower and lower returns that are now in the 5 per cent area for full-year 2016. These issues mainly stem from decreasing revenues due to insufficient volumes and accelerating margin compression.

Yet restoring profitability is easier said than done. Cost-cutting is the most obvious answer in the current low-growth, low-interest-rate environment, yet the downside of cost-cutting may be greater than its upside. Consider the many banks that suffer from the use of costly legacy IT systems: Upgrading this infrastructure would require heavy investment and involve elevated operational risk. Banks could also reduce the number of employees, but that might prove controversial for systemically important banks in countries with high unemployment.

We doubt that the ECB in its supervisory capacity will materially help large European banks to improve their profitability. Rather, the ECB’s recent supervisory actions have focused on strengthening the banks’ capital positions and asset quality. As a result, large European banks are better-capitalized and better-provisioned, but they are not more profitable.

Unfortunately, this situation is hard to solve quickly and may in fact be here to stay, which could lead to heightened market instability. In fact, the EURO STOXX Banks (Price) Index has already lost close to 30 per cent of its year-to-date market value, and the index’s price-to-book ratio is now around 70 per cent. Similarly, banking debt has significantly underperformed when compared to other types of corporate debt.

As such, we expect market volatility to be the order of the day for the European banking sector for the coming months – and possibly for years – with no clear upward or downward direction overall. We also believe passive investment strategies are likely to miss opportunities linked to this volatile state. Active strategies, on the other hand – particularly those that rely on detailed fundamental analysis – may be better-suited to help investors navigate today’s tough environment for European banks.
 

Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.

The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.

This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations.

This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424, Member of Japan Investment Advisers Association]; Allianz Global Investors Korea Ltd., licensed by the Korea Financial Services Commission; and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.

© 2016 Allianz Global Investors. All rights reserved.

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