ExpertEye European Automotive Report Q3 2016

However new vehicle sales continue to face a severe downside risk due to the Southern European banking crisis and the backlash to globalisation. With the UK now likely to exit the EU in 2019 following an Article 50 invocation next year and the potential for any combination of Italy, France or Germany to at the very least destabilise the EU sales or even potentially trigger their own exits in 2020 vehicle sales are set to endure another volatile period. Our latest view is that sales, in particular passenger cars will see a fairly normal cyclical decline in 2020 with a further drop in 2021; however the current political uncertainty has the potential to destabilise the industry which could yet see car sales actually falling by as much as 6-8% instead of rising over the next couple of years. Residual Values Like new vehicle sales Residual Values are exposed to the same risk factors and uncertainty. Since 2010 the underlying trend for RVs has remained upward with an overall rise of around 9% between 2010 and 2016. Part of the problem with this is that once RVs start to head downward in a typical cyclical pattern the industry starts to suffer with leasing companies failing to achieve contract end RVs in the used car market and disillusioned retail buyers who Next twelve months are the most find they have no equity in their PCP to act as a deposit on their next vehicle. We are already politically uncertain in a generation seeing this problem in the UK market and the next 12 months or so could see the pattern repeating across Europe where RVs have now pretty much recovered to pre-crisis levels everywhere and the downward cycle is now looming, even putting aside all of the downside RVs plateau and set to start downward cycle risks previously outlined. Assuming Europe does not fall into yet another crisis period we still believe RVs have hit a plateau across most of Europe and will continue to fall in the UK. But the next twelve months are the most politically uncertain in a generation and there is clearly a 25% risk of a 10-12% fall in values sometime over the next 2-3 years. This means anybody investing in vehicle assets needs to ensure they are building adequate protection during the relatively good times we are currently in order to weather the looming storm. European Automotive Report - 2016 Quarter 3 28

ExpertEye European Automotive Report Q3 2016 | Page 29