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Some Say U.S. Market About To Shrink, Others See Stability

Some Say U.S. Market About To Shrink, Others See Stability.

But Morgan Stanley Sees Big Risk Of Monumental Change.

“There is no historical precedent for the pace of technological change impacting new cars that we expect to see over the next 3 to 5 years”

Arguments are raging about the condition of the U.S. auto market, but Morgan Stanley says the current turmoil might conceal something far more sinister adding up to an existential threat.

A report from Deutsche Bank suggested that weak U.S. sales in March, falling to an annual rate of 16.6 million, coupled with the threat of rising interest rates and a slide in second car prices might put the skids under the market.

“…. rising interest rates, rising negative equity in vehicle loans and used vehicle-price deflation. This could lead to deteriorating affordability, delayed trade-in cycles, consumer shifts from new to used, diminishing credit availability and deteriorating mix-pricing,” the Deutsche Bank report said.

On the other side of the argument, the U.S. National Automobile Dealers Association (NADA) said it still reckons sales in 2017 will be over 17 million, with a small, 2.5 per cent decline from the record 17.5 million of 2016.

Standard & Poors warned about U.S. market weakness, without sounding apocalyptic.

“Although the U.S.’s continued economic recovery has been broadly supportive, we believe that declining retail demand, the increased use of incentives and a less favourable lending environment will likely limit the growth prospects for auto sales,” said S&P analyst Nishit Madlani.

Incentive danger
S&P said incentive spending remained above 10 per cent in March, higher than the typical 7.5-9.5 per cent range of the last seven years, and is likely to “…. significantly elevate pricing pressure for automakers over the next 12-18 months”.

Barclays Equity Research said things aren’t that bad, yet.

“Yes we see all the late cycle concerns, but we’re not so sure the situation has really incrementally deteriorated over the past few months,” said Barclays U.S. analyst Brian Johnson.

But he did say worries about the automotive sales cycle made it difficult to own industry stocks.

“Inventories are elevated, but that’s not overly worrisome for now, but rather more a sign that we are deep in the cycle,” Johnson said.

Evercore ISI also tried to put on a brave front, maintaining its view that sales will hold around recent high levels.

“We highlight on-going pressure from leasing; with the focus on residual values and their implications for used and new car prices – negative for (manufacturer) margins and potentially resulting in incremental depreciation at captives. However we DO NOT (its capital letters) view auto credit as the next “Subprime Crisis/Big Short,” said Evercore ISI analyst Arndt Ellinghorst.

The sky is about to fall for Morgan Stanley though, which now calls its industry analysis “Autos and Shared Mobility” to indicate its forward thinking. Morgan Stanley analyst Adam Jonas says imminent root and branch technology changes coupled with auto loan problems might threaten a sudden slowdown in sales, threatening profits.

Will vehicles be cut off in their prime?
“There is no historical precedent for the pace of technological change impacting new cars that we expect to see over the next 3 to 5 years,” Jonas said.

Jonas said usually a new car is designed to last for up to 20 years, but because of changing technology, tastes, insurance and regulations, he wondered if current vehicles will see the end of their useful life. There is an elevated risk to auto credit from accelerated vehicle obsolescence from –

  • Significant improvements in active safety technology as standard equipment.
  • Potentially significant changes in propulsion technology towards more affordable and capable electric vehicles.
  • Deteriorating auto credit conditions that, at the margin, may lead consumers to stay in the current car (and car loan) rather than buying new.

Jonas doesn’t give any hint of the scale of any possible collapse.

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