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  • April 11, 2018
    Fixed Income
    Hitting the brakes on US autos
    Ilana Elbim
    The slowdown in US auto sales and the heavy use of financing deals by car buyers have driven Ilana Elbim, Credit Analyst at Hermes Investment Management, to take a cautious stance on the sector. The US automotive sector has shifted up through the gears since the 2008 financial crisis. Seasonally adjusted annual sales (SAAR) of new cars and light trucks reached a peak of 17.6m in 2016, higher than the 16.2m recorded in 2007 and 10.4m as the crisis unfolded in 2009. By interrogating the data, we find that light trucks – including pick-up trucks, sports utility vehicles and crossovers – have led the ongoing recovery since 2015 as passenger-car sales began to decline (see figure 1). This demand was driven by factors including evolving consumer preferences, lower oil prices and manufacturers’ aggressive use of discount incentives. Macroeconomic conditions also helped fuel the recovery, enabling automakers to offer financing to potential buyers at low interest rates and with longer terms. Immediately after the crisis, the proportion of vehicles bought through finance was in the mid-70% range but today it stands at 85%.
  • March 26, 2018
    Fixed Income
    Hitting the skids? Investing defensively in the US auto sector
    Ilana Elbim
    The slowdown in US auto sales, heavy use of financing deals by car buyers and the leverage assumed through a recent acquisition have driven us towards a defensive position against auto-parts specialist American Axle. The US automotive sector has shifted up through the gears since the 2008 financial crisis. Seasonally adjusted annual sales (SAAR) of new cars and light trucks reached a peak of 17.6m in 2016, higher than the 16.2m recorded in 2007 and 10.4m as the crisis unfolded in 2009 . By interrogating the data, we find that light trucks – including pick-up trucks, sports utility vehicles and crossovers – have led the ongoing recovery since 2015 as passenger-car sales began to decline (see figure 1). This demand was driven by factors including evolving consumer preferences, lower oil prices and manufacturers’ aggressive use of discount incentives. Macroeconomic conditions also helped fuel the recovery, enabling automakers to offer financing to potential buyers at low interest rates and with longer terms. Immediately after the crisis, the proportion of vehicles bought through finance was in the mid-70% range but today it stands at 85% .
  • March 1, 2018
    Fixed Income
    Rise of electric vehicles - end of the road for the internal combustion engine?
    Ilana Elbim
    The long-dominant internal combustion engine is rapidly taking a back seat to electric vehicles, as regulation drives innovation in the automotive sector, according to the latest Credit Spectrum. In the paper, Ilana Elbim, Credit Analyst at Hermes Investment Management, assesses how this represents a step change for traditional automotive manufacturers and has important implications for credit investors in both the short and longer term.
  • February 27, 2018
    Fixed Income
    Electric vehicles: An accelerating trend?
    Ilana Elbim
    Concern about climate change and air pollution is driving an increasing focus by governments on the environmental impact of the automotive sector. Regulation has become a key driver of innovation, accelerating the move away from the long-dominant internal combustion engine (ICE), with fully electric vehicles (EVs) rapidly emerging as the key alternative. For credit investors, this represents a step-change for traditional automotive manufacturers with important implications both in the short and longer term. In our view, the evidence suggests that GM, one of the biggest global auto companies, is better positioned for this transition than a long-standing rival, Ford, presenting an investment opportunity.
  • May 12, 2017
    Fixed Income
    L Brands: an attractive buy amid the US retail sell-off
    Ilana Elbim
    Business has been tough for US retailers. Industry-wide challenges have resulted in weak performance across the sector, leading to widening credit spreads. In some cases, these movements have been excessive, providing opportunities for investors to gain exposure to attractively valued companies with strong credit profiles and effective strategies for adapting to change. Challenging conditions: priced in, or leading to over selling? Despite a supportive US economy, with improving macroeconomic data and rising consumer confidence, retailers have suffered. This is primarily due to secular changes in the industry, which include: consumers’ growing preference for experiences instead of clothing, declining tourist numbers (and therefore holiday shoppers), unseasonal weather, and increasing competition from e-commerce pure players such as Amazon. This has led the performance of speciality retailers and department stores to weaken in the past few quarters. Most have reported worsening like-for-like store sales, and increasing competition has forced prices – and hence operating profit margins – down. Some have responded by closing bricks-and-mortar stores to adapt to the growth of online shopping.
  • January 11, 2017
    Fixed Income
    Macy’s in a muddle: investing defensively in US retail
    Ilana Elbim
    Despite an improving domestic economy, the US retail industry is under pressure. Changing consumer preferences, falling tourist numbers, unseasonal weather and the rise of fashion e-retailers are among the reasons why US retailers – and department stores in particular – are struggling. We responded to this structural change with a defensive trade involving Macy’s, whose flawed strategy for reviving sales has proved one of the least effective in the sector. Last November, we assessed how these dynamics are increasingly affecting US retailers and focused on two department stores, Macy’s and JCPenney, in Spectrum, our quarterly newsletter. We concluded that despite similar elements in their respective strategies, such as a focus on private brands and exclusive products, Macy’s should ultimately underperform given specific weaknesses in its plan.