Carmakers' bonds look good value in the short term but long-term challenges persist
The auto sector and credit markets have long had a love-hate relationship.
Back in 2005, when the prospect of downgrade to high yield for Ford and General Motors first loomed large, some thought that credit markets might implode.
They eventually did, although not for another two years.
Roll the clock forward 15 years and are we staring into a similar abyss?
Ford was downgraded in September to high yield by Moody's, but remains investment grade-rated by both Standard & Poor's and Fitch, and as such still qualifies as investment grade by index providers.
In September and October, General Motors suffered more than a month of strikes, estimated as costing the company $50m to $75m every day.
The ratings agencies have maintained stable investment grade ratings for GM, however, with sustained profitability compared to the previous cycle thanks to US consumer demand for SUVs, where GM and Ford are domestic leaders, which provide higher margins to the companies.
Bond yields for both companies look cheap compared to their peer groups, however. For those seeking some short-dated carry to credit portfolios, auto manufacturers may still offer a solution to that problem.
We are strong believers the right place to hold these potentially more volatile names is in the front end.
But what will happen to the auto industry in the long term? The transition to low-carbon economy - traditional fossil-fuel guzzling vehicles are clearly not going to help on this front.
Peugeot and Fiat Chrysler Automobiles recently announced a merger and Ford and Volkswagen are to share an electric vehicle platform in Europe.
Potential consolidation in the industry has been suggested from 40 or more companies currently to just five to ten in the next decade.
Technology/ride-sharing/car-sharing are entering the market by joining up with auto manufacturers and GM is the second most-advanced leader in self-driving technology. But the long-term impact on car demand is unclear.
Given the muddied backdrop to global growth, and the fact the Chinese market is the largest in the world and sensitive to trade wars, what are the implications for future vehicle demand?
Rachel Harris is head of credit and equity investment specialists at Aviva Investors
Bull Points
• The US auto manufacturers at least have strong short-term cashflow
• A downgrade to high yield could be a catalyst for tighter spreads
Bear Points
• Ever more stringent regulatory pressures for emission reduction in Europe and China will keep cashflow generation of automakers under pressure for the foreseeable future
• Consumers may change habits, therefore limiting car volume growth
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