With investors still trying to digest the scandal around (real) car emissions, fears are emerging that this could evolve into more than an issuer-specific risk. To begin with, there are worries that other automakers have tricked customers into believing that their technology is more advanced than it actually is and this has been evident in the under-performance of auto stocks and bonds over the past few days. Even if these speculations will ultimately prove to be unfounded, they could delay consumers purchasing decisions and, hence, affect sales volumes.
In light of the recent developments, I did a quick exercise and looked at the exposures of different corporate bond indices to the automotive sector. For this purpose I used the Bank of America Merrill Lynch indices and the first interesting finding is that the euro segment of the market is more exposed to this sector than the USD one. Nevertheless, the sectorial allocation is rather low for the investment grade indices with the EUR high yield (HY) Index standing out as the most vulnerable to a broader and deeper under-performance of the automotive sector.
That is, eight per cent of the BAML EUR HY index is represented by auto-related names with a similar percentage estimated for another popular EUR HY Index, the Iboxx EUR High Yield Index. In terms of issuers, the two indices include Peugeot, Fiat Chrysler, CNH Industrial and a number of auto parts manufacturers such as Faurecia, Gestamp and Schaeffler. Most of these names have a composite rating that places them in the single-B rated bucket, which could lead to further underperformance of this segment of the market relative to the higher rated HY peers (i.e. BB-rated).
Having said that, much seems to depend on how Fiat Chrysler (FCA) will weather the storm, as this issuer is by far the most significant auto HY issuer; it accounts for about three per cent of the EUR High Yield Indices and a staggering 10 per cent of the BAML EUR B HY Index. So far this week, the FCA bonds lost around two points with the shorter maturity notes posting losses which were more in line with the broader market weakness.
Overall, I remain of the opinion that at this stage the investment grade space and the higher end of the high yield market offers the most attractive return potential for EUR bond investors. This reflects my cautious view on the ongoing economic recovery in Europe, or to be more accurate, my scepticism regarding its sustainability. The global environment is already challenging ECB’s forecasts and the banks’ subdued appetite for corporate lending shows that more is required for growth to consolidate in the longer term. Just yesterday, we saw that the latest ECB Targeted Long term refinancing operation (TLTRO) was met with below expectation demand ; this facility, simply put, makes cheap funding available for banks which are willing to use the funds to grant loans, concluded with an allotment of only €15.5 billion.
This article was issued by Raluca Filip, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.