Investing in cars and carmakers

After my old banger finally bit the dust last week, we spent Saturday car shopping, and I have to say it was a very pleasant experience. Despite the social-distancing measures, we were able to test drive four different cars from four different dealers in under two hours – and with two children in tow.

My head was turned by a very pretty three door Fiat 500 (the inside reminded me of my ‘Mini days’ pre-babies), but in the end we opted for a much more practical (five doors with plenty of room in the boot) Hyundai i10. Not as exciting, but it does have alloys.

How can you invest in cars?

New cars depreciate by an average of 10% the moment a driver leaves the dealership, so the traditional way to invest in cars has been via the old classics. But climate change concerns could impact this market going forward. There is pressure to ban all older cars from the roads, except for events like the London-Brighton run and one-off club meetings or shows.

So, what about investing in the shares of carmakers instead of the cars themselves?

Richard Woolnough, manager of M&G Strategic Corporate Bond, M&G Corporate Bond and M&G Optimal Income funds, said last month that he thinks carmakers “were unduly punished by investors as global lockdowns were imposed, and still have qualities unrepresented by either their stock market value or bond price”. He holds a 1.1%* position in a bond of General Motors, the largest automobile manufacturer in America.

Of course, the carmaker making all the headlines in recent months has been Tesla. Having been founded 17 years ago, the electric car company has just reported its first full year of profits, putting it on track to join the S&P 500 stock market index in September. Now the top holding in Scottish Mortgage Investment Trust*, the share price has risen some 300% over the past four months alone**.

Zed Osmani, manager of Legg Mason IF Martin Currie European Unconstrained has the glamorous Ferrari in his top ten holdings*. The company plans to reveal two new models later this year and push into new markets. Zed talked about Ferrari’s global reach in this video interview.

Ninety One Global Special Situations has chosen to invest in the more traditional Rolls Royce*** and, for those Americans looking for a second-hand car like myself, cars.com***, the digital marketplace for car sales, service and repairs.

In a similar vein in the UK, ES R&M UK Recovery also owns Rolls Royce^ and made a significant purchase in both Volvo^ shares and Autotrader during the past quarter when share prices had fallen to attractive values. Manager Hugh Sergeant told us about recent additions to the portfolio in this podcast.

Volvo’s first fully electric car, the XC40 Recharge P8 Pure electric, is due to be released before the end of the year. It is supposed to have a range of 400km, produces 402bhp, accelerates from 0 to 100kph in under five seconds, and can top up 80% of its battery in just 40 minutes.

Other car-related holdings in ES R&M UK Recovery include Hyundai Mobis^ (the car parts manufacturer) and TI Automotives^ (automotive fluid systems maker).

Traffic volumes are up

While the car showrooms were relatively quiet when I was browsing, all the surveys indicate there is pent-up demand for new cars after lockdown and the second-hand market is also up as people look for alternatives to public transport. The roads definitely seem busier, even with many still working from home.

And the UK is not alone in this increased activity. According to the managers of First State Global Listed Infrastructure fund, toll road traffic volumes for European, Chinese and Australian roads have all experienced upward trends in the past few months.

Chinese toll road operator and holding in the fund, Jiangsu Expressway, which owns the 275km Shanghai–Nanjing Expressway, one of China’s busiest expressways reported increases of between 8% and 10% in traffic numbers for May, even though its toll free period ended on May 6th.

French toll road operator Vinci, another fund holding, also held up well. “While this year’s earnings have been significantly impacted by France’s lockdown, the company is now seeing improving trends in traffic levels on its highways, with French economic stimulus measures expected to support its construction business segment,” the managers said.

A traffic update from Australian peer Transurban showed that its roads with a heavy vehicle focus are now seeing close to normal volumes. However, routes with airport traffic, and North American Express Lanes (which rely on higher congestion), are taking longer to recover.

*Source: Fund factsheet, 30 June 2020
**Source: FE Analytics, full holdings lists, 31 May 2020
***from 18 March to 24 July 2020
^Source: fund quarterly report, 30 June 2020