CGA - WE car market - June update

This document has been prepared by Creative Global Advisers (UK) LLP (‘CGA (UK)’) solely for the use of its clients and for purely informational purposes. It does not constitute or
contain advice on the merits of investing in any investment nor does it constitute or form part of a prospectus or any such offer or invitation to sell or to issue, or any solicitation of any
offer to invest in, any investment, nor shall it or any part of it or the fact of its distribution form the basis of, or be relied on in connection with, any such offer, invitation or solicitation,
nor constitute any contract therefore. Neither CGA (UK) nor any of its members or employees give any representation or warranty, express or implied, as to the fairness, accuracy,
completeness or correctness of any information or expressions of opinion contained in this document.
This document, insofar as it is distributed in or into the United Kingdom, is for distribution only to persons to whom the financial promotion restriction in section 21(1) Financial Services
and Markets Act 2000 does not apply by virtue of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (SI 2005/1529) (the ‘Financial Promotion Order’).
This document is directed at Investment Professionals as defined in article 19 of the Financial Promotion Order who have professional experience in matters relating to investments.
Persons who do not have professional experience in matters relating to investments should not rely on this document. The contents of this document have not been approved by an
authorised person. The distribution of this document in other jurisdictions may be restricted by law and persons into whose possession this document comes should inform themselves
of, and observe, any such restrictions. Any failure to comply with these restrictions may constitute a violation of the laws of any other such jurisdictions.
Automotive Research
Sabine CJ Blümel
Tuesday, 20th
June 2017
Sabine CJ Blümel
Principal
CGA (UK) LLP
sabine@cjblumel.com
+44 7785 301 588
Creative Global Advisers
(UK) LLP
64, Holland Park
London W11 3SJ
W Europe car market
June update
Market bounces back in May, despite sharp decline in UK
WE car registrations: +6.8% in May; +4.3% in YTD; +2.9% in 2017E
• The WE pc market was running at a May SAAR of 14.52m, up 8.4% mom/from
April’s 13.39m. YTD SAAR of 14.38m topped FY16’s 13.97m by 2.9% and
remained 1.5% below the 2000-07 LT pre-crisis level of 14.69m. (See pp.3-13.)
• Italy and Spain continued to be the most dynamic of the large Europen
markets, with resp. YTD growth rates of 8.1% and 7.3%, though they are still
running almost 15-20% below LT pre-crisis trend.
• In Germany, a 12.9% increase in May resulted in a 4.7% increase YTD. YTD
SAAR of 3.42m was 2.1% better than FY16’s 3.35m and 3.7% higher than the 2000-
07 LT pre-crisis level of 3.3m.
• The WE car market is set to decelerate in FY17E and grow 2.9% to 14.38m. The
expected moderate FY17E increase of 405k units should again be spear-headed by
Italy and Spain and negatively affected by a decline in the UK.
• UK car registrations declined 8.5% in May, resulting in a -0.6% dip YTD. While
the vote for Brexit seems to have had little impact on the UK car market so far, the
change and increase in road taxation for new cars purchased after 1st April has
greatly distorted sales over the past few months.
• The UK enters the Brexit negotiations in political turmoil: A weakened Theresa
May might have increased the likelihood of a softer Brexit deal, but also increased
uncertainty and thus the risk of a disorderly Brexit.
• UK short-term outlook: The Brexit vote’s fall-out of a drastically weaker and volatile
sterling should lead to a sharp deceleration in GDP growth and private consumption.
The UK car market is expected to have peaked at 2.69m in FY16 and to decline
by -5.5% to 2.54m in FY17E. A weaker pound is responsible for sharp increases in
sticker prices as 90% of cars sold in the UK are imports. (See pp.10-13 for details.)

Sabine CJ Blümel – Automotive Research 20/06/2017
CGA (UK) LLP sabine@cjblumel.com +44 7785 301 588 Page 2
Table of Contents
Western Europe car market ..............................................................................................................................................3
Germany........................................................................................................................................................................6
France............................................................................................................................................................................7
Italy ................................................................................................................................................................................8
Spain..............................................................................................................................................................................9
UK update....................................................................................................................................................................10

Western Europe car market
+6.8% in May
+4.3% in YTD
+5.8% to 13.97m in FY16
In May, WE passenger car registrations increased 6.8% yoy to 1.13m, after having
declined 8.0% in April, resulting in a 4.3% increase to 6.38m YTD. This follows increases
of 7.4% in 1Q17 and 5.8% to 13.97m in FY16. Headline figures in May benefited from
an additional working day yoy in most markets, and in April, were affected by at least two
fewer working days yoy in most markets.
YTD SAAR of 14.38m In May, the SAAR strengthened again to 14.52m, up 8.4% mom/from April’s 13.39m and
only 1.1% below March’s 14.67m, the strongest month since November ’09 (14.78m).
YTD SAAR of 14.38m topped FY16’s 13.97m by 2.9% and was 1.5% below the 2000-
07 LT pre-crisis level of 14.69m.
All Big 5 advance
strongly in YTD
Germany +4.7%
France +3.3%
UK -0.6%
Italy +8.1%
Spain +7.3%
Germany, Western Europe’s largest car market increased 12.9% in May and 4.7% to
1.46m units in YTD. YTD SAAR of 3.46m was 3.1% better than FY16’s 3.35m and 4.7%
higher than the 2000-07 LT pre-crisis level of 3.3m. French car registrations increased
8.9% in May and 3.3% to 0.90m YTD. YTD SAAR of 2.13m was up 5.8% on FY16’s
2.02m and 2.2% on the 2000-07 LT pre-crisis level of 2.09m. The UK car market declined
8.5% in May, resulting in a -0.6% dip to 1.16m units YTD. YTD SAAR of 2.58m was 4.1%
below FY16’s 2.69m and 5.6% above pre-crisis LT level of 2.45m. YTD, Italian car
registrations increased 8.1% to 0.95m and the SAAR of 1.99m was 8.9% higher than
FY16’s 1.82m, but remained 14.9% below the 2000-07 LT pre-crisis level of 2.34m. YTD,
Spanish car registrations increased 7.3% to 0.54m and the SAAR of 1.21m was up 5.2%
from FY16’s 1.15m and remained 18.3% below the 2000-07 level of 1.45m. (See
discussion of the Big Five on pp. 4-13.)
Economic indicators
continue to improve…
…Eurozone economy
Market set to decelerate
sparply…
…to 2.9% to 14.38m in
FY17E
In the Eurozone, GDP growth continued to accelerate, from 0.5% qoq in 4Q16 to 0.6 %
qoq in 1Q17, and is expected to accelerate in FY17E, from FY16’s 1.7%. Indeed,
consumer and business indicators have continued to improve, with the former hitting a
10-year high in May and the latter a six-year high in April. However, in 2017 and beyond,
we see considerable downside risks for the Eurozone economy related to Brexit (weak
sterling and economic slow-down in the UK), elections in several countries (Germany
and Italy) and possible disruptions to international trade, mainly due to president Trump.
In addition, a pick-up in inflation (base effect, recovery in commodity prices) should have
a dampening effect on disposable income and thus on private consumption, to date a
main driver of GDP. For the UK, GDP growth is expected to decelerate from (restated)
1.8% in FY16, to 1.6% in FY17E and 1.0% in 2018E. We expect that the WE car market
is set to decelerate from FY16’s 5.8% to 2.9% to 14.38m in FY17E. While in FY16 the
increase of 770k vehicles was spearheaded by Italy, Germany and Spain, the expected
more moderate increase of 405k units should be spear-headed by Italy and Spain and
affected by a decline in the UK.
Competitive pressures
set to intensify as the
markets slow
During the four-year recovery, the WE car market remained overshadowed by tough
competition and pricing pressures. Indeed, as the market is heading for a considerable
slow-down, discounts have reportedly increased to some 20% in core markets, fleet
sales are taking over momentum from retail sales and HH leverage is increasing. In
addition to record discounts, special deals and cheap financing, OEMs and dealers have
increasingly resorted to tactics such as pre-registering. Since July‘16, the OEMs’ woes
have been exacerbated by a weaker pound and the prospect of a declining UK market.
Polarisation in demand The trend of polarisation in demand into premium and discount brands and products has
been intact for the past 20 years. Driving forces have been the downsizing on the part of
the premium brands and an improvement in quality of discount branded products. This
has dramatically eroded the market position and share of European mainstream brands
such as GM’s Opel/Vauxhall and Ford, and local champions such as Renault, Peugeot,
Citroen and Fiat. The mainstream brands of the VW group have incurred a reversal in
their market outperformance since the break of the diesel scandal in September ‘15.

W Europe – monthly SAAR1
vs. trend (Oct’08–May’17) W Europe – pc registrations (1998-2019E)
(1) SAAR according to calculations by LMC Automotive. Source: ACEA, LMC Automotive, CGA
(UK) calculations
Source: LMC Automotive and CGA (UK) estimates
W Europe – pc registrations (1961-2020E) Eurozone – real GDP and priv. consumption (2007-19E)
Source: ACEA, LMC Automotive and CGA (UK) estimates Source: Oxford Economics, IMFand CGA (UK) estimates
W Europe – depth of recession – 2008-20E volume
decline vs. 2007
W Europe – current recession in historic context
Depth1 Duration
Trend growth
rate
(Units m) (%) (years) (%)
1970 - oil shock -1.15 -12.4 < 3 5
Early 1980s recession -0.75 -7.0 ~ 6 3-4
1993 recession -2.26 -16.8 ~ 5 2-3
Current crisis (E) -3.26 -22.0 ~13 1-2
Source: LMC Automotive and CGA (UK) estimates Source: LMC Automotive and CGA (UK) estimates

Premium brands, Japanese and discount brands – WE
market share (’92-’17*)
Mainstream brands: VW group (excl. Audi & Porsche),
Opel/Vauxhall, Ford, FCA – WE share (’92-’17*)
(1) Premium brands: BMW, Mini, Mercedes-Benz, Smart, Audi, Lexus, Porsche, Jaguar, Land
Rover, Volvo, SAAB, DS and super-premium brands. (3) Discount brands: Kia, Hyundai, GM’s
Chevrolet, and Renault’s Dacia & LADA. (2) Exl. Lexus (*) YTD=Jan-May. Source: Association
Auxiliaire de l'Automobile, ACEA, CGA (UK) calcs
(1) VW mainstream brands: VW, Seat, Skoda. (2) FCA: Fiat, Lancia & Alfa Romeo. Since 2012
also Chrysler & Jeep. (*)YTD=Jan-May. Source: Association Auxiliaire de l'Automobile, ACEA,
CGA (UK) calculations
PSA & GME – WE share (’92-17*) PSA and Renault group – WE share (’92-’17*)
(1) (1) PSA: Peugeot, Citroën & DS brands (2) GM Europe: Opel, Vauxhall, Chevrolet and other
US GM brands. (*)YTD=Jan-May. Source: Association Auxiliaire de l'Automobile, ACEA, CGA
(UK) calculations
(1) PSA: Peugeot, Citroën & DS brands; (2) Renault group: Renault and Dacia brands.
(*)YTD=Jan-May. Source: Association Auxiliaire de l'Automobile, ACEA, CGA (UK) calculations
W Europe – pc market by OEM (FY16) W Europe – pc market by OEM (Jan-May’17)
(*) VW group incl. Porsche. (**) Fiat group incl. Chrysler and Jeep. Source: Association Auxiliaire
de l'Automobile, ACEA and CGA (UK) calculations
(*) VW group incl. Porsche. (**) Fiat group incl. Chrysler and Jeep. Source: ACEA and CGA (UK)
calculations

Germany – monthly SAAR1
vs. trend (Oct’08-May’17) Germany – pc registrations (1998-2019E)
(1) SAAR according to LMC Automotive. Source: KFBA, LMCA and CGA (UK) calculations Source: KFBA, LMC Automotive and CGA (UK) estimates
Germany
+12.9% in May
+4.7% in YTD
YTD SAAR of 3.46m
In May, the German pc market increased 12.9% yoy to 324.0k units, after having
declined 8.0% in April, resulting in a 4.7% increase to 1.46m units in YTD. Underlying
demand increased again in May, to a SAAR of 3.59m, 12.2% up mom/from a SAAR of
3.20m in April and was the strongest month since the subsidy boosted October ’09
(3.65m). YTD SAAR of 3.46m was 3.1% better than FY16’s 3.35m and 4.7% higher
than the 2000-07 LT pre-crisis level of 3.3m.
+2.2% to 3.42m in FY17E
In 1Q17, GDP growth accelerated, to 0.6% qoq, from 0.4% in 4Q16, driven by domestic
and foreign demand and investments. The outlook for the German economy keeps
improving and in 2017E-18E, GDP growth is now expected to barely decelerate, if at all,
from FY16’s 1.8%. However, private consumption is expected to underperform GDP
growth: despite a tight labour market (unemployment rate of 3.9%), nominal annual wage
increases have remained below 3% since 2011, restraining growth in disposable income.
For the past two years, consumer confidence has thus remained (only) stable, though at
a 10-year high. After a 4.5% increase in FY16, the German car market is set to grow
another 2.0% to 3.42m in FY17E. Replacement demand from the incentive-driven
boom in 2009, when 3.81m cars were sold is a supporting factor.
Some reversal of retail
share decline…
..driven by aggressive
marketing
During its solid recovery over the past four years, the pricing improvement has been only
moderate with discounts reportedly above 20% and the quality of the market poor.
Accounting for more than 30% of car sales, pre-registrations are sold by dealers as
‘used’ cars at considerable discounts. With the market back at pre-crisis level and growth
slowing, aggressive marketing to private customers has intensified and explains why, in
May’16-April’17, against LT trend, retail sales outperformed fleet sales. In May, retail
sales underperformed again; growing just 8.5%. YTD retail sales were up 4.9% at a
34.3% share, compared to 33.3% in YTD16 and 34.2% in FY16.
Germany – pc market shares (2010,13,15,16) Germany – real GDP and priv. consumption (2007-19E)
(*) VW group incl. Porsche. Source: KFBA and CGA (UK) calculations Source: Oxford Economics, IMF and CGA (UK) estimates

France – monthly SAAR1
vs. trend (Oct’08-May’17) France – pc registrations (1998-2019E)
(1) SAAR according to calculations by LMC Automotive. Source: CCFA, LMC Automotive and
Source: CCFA, LMC Automotive and CGA (UK) estimates
France
+8.9% in May
+3.3% in YTD
YTD SAAR of 2.13m
In May, French car registrations increased 8.9% to 175.8k units, after having declined
6.0% in April, resulting in a 3.3% increase to 0.90m YTD. Adjusted for the number of
working days, the market was up 8.9% in May, 3.9% in April and 3.3% in YTD. In May,
underlying demand strengthened again to a SAAR of 2.24m, 11.4% up mom/from April’s
SAAR of 2.01m and was the strongest month since March’11 (2.56m). YTD SAAR of
2.13m was up 5.8% on FY16’s 2.02m and 2.2% on the 2000-07 LT pre-crisis level of
2.09m.
Economy
underperforming,…
…but not fragile
France’s macro-economic credentials have remained mixed and weaker than the
Eurozone average: GDP growth decelerated again, from 1.3% in FY15 to 1.2% in FY16,
and more recently from 0.5% qoq in 4Q16 to an (upward) revised 0.4% in 1Q17. In
2017E-18E, GDP growth is expected to accelerate from FY16’s 1.2%, though remain
below Eurozone average. Private consumption should remain a key economic driver as
consumer confidence has steadily improved throughout the past four years to pre-crisis
levels, helped by low inflation and a (slow) improvement in the labour market.
Majority in parliament…
…has greatly increased
Macron’s scope for
manoevre
France’s economic performance from 2H17 onwards will greatly depend on the progress
pro-business president Macron will be able to make in tackling France’s many structural
problems; top of his list is reform and deregulation of the rigid, two-tier labour market.
The outlook for economic reform has greatly increased since last Sunday, 18th June,
when Macron’s party secured a decisive majority in the French parliament. Indeed, now
vested with legislative as well as executive power, president Macron has considerable
more scope of manoeuvre than his predecessor.
+3.5% to 2.09m in FY17E
With a medium-term outlook for the French pc market of 2.1-2.2m units, we expect
a 3.5% increase to 2.09m in FY17E, after 5.1% in FY16.
France – pc market shares (2010,13,15,16) France – real GDP and priv. consumption (2007-19E)
(*) VW group incl. Porsche. Source: CCFA and CGA (UK) calculations Source: Oxford Economics, IMF and CGA (UK) estimates

Italy – monthly SAAR1
vs. trend (Oct’08-May’17) Italy – pc registrations (1998-2019E)
(1) SAAR according to calculations by LMC Automotive. Source: ANFIA, UNRAE, LMC Automotive
and CGA (UK) calculations
Source: ANFIA, UNRAE, LMC Automotive and CGA (UK) estimates
Italy
+8.2% in May
+8.1% in YTD
YTD SAAR of 1.99m
In May, the Italian pc market increased 8.2% yoy to 204.1k units, after having declined
4.6% in April, resulting in an 8.1% increase to 0.95m YTD. In May, the Italian pc market
was driven by fleet sales (+41%) and sales to rental companies, both categories
receiving tax incentives. Underlying demand strengthened again in May, to a SAAR of
1.99m, up 10.1% mom/from April’s SAAR of 1.81m and remained 6.0% below March’s
SAAR of 2.12m that had been the strongest month since December 2010 (2.15m). YTD
SAAR of 1.99m was 8.9% higher than FY16’s 1.82m, but remained 14.9% below the
2000-07 LT pre-crisis level of 2.34m.
Economic recovery
remains anemic
Banking sector danger
to eonomy
Italy’s recovery from a three-year, triple-dip recession has struggled to gain momentum
and GDP growth remained anaemic. However, according to revised figures, GDP growth
actually accelerated from 0.3% qoq in 4Q16, to 0.4% in 1Q17, making the latter the
strongest quarter in one year thanks to inventory building and domestic demand. In view
of the extraordinarily weak banking sector and a multitude of structural problems,
economic growth should struggle to reach 1% in 2017E-18E. Private consumption, the
main driver of Italy’s recovery so far, is set to decelerate from 1.3% in FY16, to well below
1% in 2017E-18E, as employment growth eases and energy prices and inflation pick up.
The political
stabilisation process
has continued
Since Matteo Renzi’s resignation as PM (December’16), national politics have remained
relatively calm under a care-taker government with former foreign minister Paolo
Gentiloni at the helm. However, the government is facing challenging decisions on next
year’s budget, the banking sector crisis and the future of Alitalia. The anti-establishment
‘Cinque Stelle’ movement has so far managed to veto reform of the electoral system that
would give the government the prerogative to call a snap election before February 2018.
+9.7% to 2.00m in FY17E In view of the economic recovery, modest as it may be, a large car parc and considerable
pent-up demand, the Italian car market is set to continue to recover strongly. We expect
that the market will grow 9.7% to 2.00m units in FY17E, after 15.8% in FY16.
Italy – pc market shares (2010,13,15,16) Italy – real GDP and priv. consumption (2007-19E)
(*)VW group incl. Porsche. Source: Anfia and CGA (UK) calculations Source: Oxford Economics, IMF and CGA (UK) estimates

Spain – monthly SAAR1
vs. trend (Oct’08-May’17) Spain – pc registrations (1998-2019E)
(1) SAAR according to calculations by LMC Automotive. Source: ANFAC, LMC Automotive and
Source: ANFAC, LMC Automotive and CGA (UK) estimates
Spain
+11.3% in May
+7.3% in YTD
YTD SAAR of 1.21m
In May, Spanish car registrations accelerated again and grew 11.2% to 126.4k, after
1.1% April, resulting in a 7.3% increase to 0.54m YTD. In May, the pc market continued
to be driven by sales to rental companies (+18%) and fleet sales (+12%), while retail
sales were up 6%. In May, the SAAR continued to strengthen to 1.26m, up 0.8%
mom/from April’s 1.25m and remained just 0.9% below September’s strong 1.27m. YTD
SAAR of 1.21m was up 5.2% from FY16’s 1.15m and remained 18.3% below the
2000-07 level of 1.45m.
Government incentive
scheme allowed to
expire after 46ms…
…as the economy has
accelerated
The strong recovery in the Spanish car market with the SAAR more than doubling
between September’12 (0.56m) and September’16 (1.27m), was initially primarily driven
by the PIVE scrappage scheme. First introduced in October ‘12, the Spanish government
topped up the scheme seven times, but let PIVE 8 expire as scheduled. During the 46ms
of stimulus, the economic recovery has gained momentum and has together with
replacement demand become the main driver. Buoyant fleet and rental sales have
prevented a dramatic pay-back in the Spanish market following the expiry of the PIVE
scrappage scheme at the end of July. On this basis, the Spanish pc market is set to
grow 6.3% to 1.22m in FY17E, after 10.9% to 1.15m in FY16.
+6.3% to 1.22m in FY17E
Spain has become one of the fasted growing economies in the Eurozone, with GDP
growing at 3.2% in FY15 and FY16. The recovery has been driven by domestic demand
and more recently, also by net exports. The economic outlook remains positive, GDP
and private consumption are expected to decelerate only moderately in 2017E-18E. In
1Q17, GDP growth even accelerated to 0.8% qoq, from 0.7% in 4Q16 thanks to fixed
investment, government spending and exports. Consumer confidence has stabilised at
above pre-crisis levels. However, unemployment, though having eased considerably to
a 7-year low in 3Q16-1Q17, at just below 19% has remained the second highest in the
EU, behind Greece and should remain a drag for years to come.
Spain – pc market by OEM (2010,13,15,16) Spain – real GDP and priv. consumption (2007-2019E)
(*) VW group incl. Porsche. Source: ANFAC and CGA (UK) calculations Source: Oxford Economics, IMF and CGA (UK) estimates

UK – monthly SAAR1
vs. trend (Oct’08-May’17) UK – pc market by OEM (2010,13,15,16)
(1) SAAR according to calculations by LMC Automotive. Source: SMMT, LMC Automotive and
(*) VW group incl. Porsche. Source: SMMT and CGA (UK) calculations
UK update
-8.5% in May
-0.6% in YTD
In May, UK car registrations declined -8.5% yoy to 186.3k units, after having declined
19.8% yoy in April, resulting in a -0.6% dip to 1.16m units YTD. This follows increases of
6.3% in 1Q17 and 2.3% to a record 2.69m in FY16,
Increase in road tax for
new cars purchased
after 1st April…
…has greatly distorted
sales over the past few
months
While the vote for Brexit on 23rdJune 2016 seems to have had little impact on the UK car
market so far, the change and increase in road taxation for new cars purchased after 1st
April has greatly distorted sales over the past few months. From 1st April, under the new
system all new cars, except those with zero emissions (i.e. BEVs and hydrogen cars),
are subject to a new vehicle excise duty (VED), an annual flat road tax. As expected,
sales of new and pre-registered cars spiked, reaching record levels in March and 1Q17
as buyers brought forward their car purchases, leading to a pay-back in April - May.
YTD SAAR of 2.58m In May, the SAAR recovered only marginally from a 21.1% mom drop in April; May’s
SAAR of 2.35m was up 5.0% mom/from April’s 2.23m.and down 15.8% from 1Q17’s
2.78m and thus remained 21.5% below December 2015’s all-time record SAAR of
2.99m. As a result, YTD SAAR of 2.58m was 4.1% below FY16’s 2.69m and 5.6%
above pre-crisis LT level of 2.45m.
Brexit update: UK in political turmoil…
TM weakened, if not
mortally wounded….
The UK enters the Brexit negotiations in political turmoil, if not chaos. Theresa May’s
position greatly weakened following the general election of 8th June and has deteriorated
further through her poor handling of the disastrous Grenfell tower fire of 14th June.
…as the snap election
delivered a hung
parliament
Theresa May’s decision to hold a snap general election backfired dramatically as the
voters returned a hung parliament. Instead of increasing their number of seats and
widening a small majority, the Tories lost 13 seats; although they remained the largest
party, with 318 seats they are eight seats short of a clear majority.
TM aims to remain PM…
…and announces long
prliament
Theresa May still hopes to be able to continue as PM and achieve a working Commons
majority through the support from (but not in coalition with) the 10 MPs of Northern
Ireland’s Democratic Unionist party (DUP) which gained two seats in the election.
Theresa May aims at having a deal with the DUP before the Queen’s speech on
Wednesday, 21st June. Faced with an extraordinarily ambitious programme of legislation,
most of which is related to Brexit, including the planned Great Repeal Bill to transfer EU
rules into UK domestic law, Theresa May announced a long parliament of two years, that
will take the current session beyond March 2019, when Brexit is planned to take place.

…as Brexit talks start in earnest
Monday, 19th
June The face-to-face Brexit negotiations started on Monday, 19th June with a meeting
between the EU chief negotiator Michel Barnier and the UK Brexit secretary David
Davies and are scheduled to last until October 2018. There are indications that both
sides are committed to keeping the negotiations constructive and cordial for as long as
possible.
‘Sequential approach’ to
Brexit talks…
…held in three
phases,…
…with ‘divorce first’
Indeed, the UK has now finally accepted the EU 27’s proposed structure and timeline for
the talks, namely a sequential, three-phase approach: phase one, dealing with the
disentangling of past ties and commitments; phase two, setting goals for future
relations; phase three, arranging transition terms. At the core of the ‘divorce’
negotiations (phase one) are an exit bill (of a gross estimate of EUR 100bn), the rights
of expatriate EU citizens (ca 3m of EU 27 citizens in the UK and 1m UK citizens in the
other 27 EU countries) and the future of Northern Ireland. (Note, that previously, the UK
government, and David Davies, wanted to ‘fast track’ proceedings and hold talks
regarding leaving the EU parallel with those relating to the outcome, namely withdrawal
terms, future relations and the transition period.)
Start of negotiations on
future relationship…
…as late as January
2018
The sequential approach means, that an agreement in principle on the exit bill and the
rights of EU migrants will have to be struck first, before negotiations about the content
(phase two, post Brexit framework and phase three, transition period) can commence.
Michel Barnier wants to have an agreement on the divorce principles by 4Q17, implying
that talks on the future relationship between the UK and EU are unlikely to start before
January 2018.
According to Article 50, ratification of a Brexit deal by EU member states, the European
Council, the European Parliament and the UK parliament must have taken place by
March 2019. By April 2019, Brexit should be complete, deal or NO deal.
Content of negotiations
EU 27 stance: any deal
inferior to full
membership
The EU 27’s stance is that no Brexit deal can be equal or even better for the UK
than the benefits of full EU membership. The generally accepted view is that there
will be a trade-off between access to the EU markets and restriction of free
movement of EU citizens, defining Brexit along the spectrum from Soft (staying in
the common market) to Hard (complete, but orderly break).
UK’s stance has beocme
elusive again
Even as the hot phase of Brexit talks has started, the UK government’s aspirations
and hopes for the Brexit negotiations have become elusive again. Theresa May’s
precarious situation has rekindled the Brexit discussion within the Tory party. This is
further complicated by the strong election result (+30 seats) of Labour that stands for a
softer Brexit.
Theresa May still
favours ‘hard and clean
Brexit’
So far, Theresa May has not gone back on her support of a ‘hard and clean Brexit’ that
involves NO formal membership of the single market and customs union and her view
that ‘No deal would be better than a bad deal’, as set out in her Lancaster House speech
of 17th January.
However, even Chancellor Philip Hammond, who campaigns to put business at the
centre of Brexit politics and to avoid a disorderly exit (no deal), wants the UK to leave
the common market and customs union, though possibly after a long and gradual
transition period.
Brexit deal likely to be
softer…
It is our view that the political instability following the general election may have
increased the likelihood of a softer Brexit deal. However, there is now also greater
uncertainty whether a deal will be struck by March 2019, i.e. whether a disorderly
Brexit can be avoided.

GBP/USD (since 1/1/2016) GBP/EUR (since 1/1/2016)
Source: Bank of England Source: Bank of England
GBP trade-weighted index (since 1/1/2016) UK gilt - 10-year yield (%) (since 1/1/2016)
Source: Bank of England Source: Bank of England
UK – Consumer confidence (Jan’08-May’17) UK – Retail sales (Jan’08-May’17)
Source: GfK NOP (UK) through Trading Economics Source: CBI through Trading Economics
…though the risk of no
deal is up
We share the consensus view that the Brexit vote, and any form of deal will have
long-term costs. There is a risk that a hard or even chaotic Brexit will end up damaging
the UK economy substantially.
Short-term economic outlook
The economy remained
resilient in 2H16….
Following the EU referendum on 23rd June, the UK economy remained more resilient
than feared and failed to decelerate in 2H16, from 0.6% in 2Q16 thanks to buoyant
private consumption that was driven by a sharp increase in consumer borrowing.
…and decelerating since
1Q17
Indicators point to an economic slowdown; this is particularly true for the consumer
sector. GDP growth decelerated sharply in 1Q17, to 0.2% qoq (downgraded from
0.3%), from 0.7% in 4Q16, due to a weakness in consumer-facing service-sector
companies
A weaker sterling set to
bite UK economy from
2017 onwards
After a brief two-month recovery period, sterling has weakened again since mid-May; its
current trading position vs. pre-referendum level is down 12% on a trade-weighted basis,
12% against the euro and 14% against the dollar, close to its post-referendum low. The
political instability should increase sterling volatility and put further pressure on
consumer confidence.

UK – real GDP and priv. consumption (2007-19E) UK – pc registrations (1998-2019E)
Source: Oxford Economics, IMF and CGA (UK) estimates Source: SMMT, LMC Automotive and CGA (UK) estimates
A weaker sterling together with firming energy prices is expected to continue to
fuel consumer price inflation and squeeze disposable income and thus hamper
private consumption. CPI is expected to continue to rise over the next 12 months, to
average more than 3% in 2017, exceeding the BoE target of 2%. Indeed, the inflation
rate rose from less than 0.5% in 1H16 and 0.8% in 2H16, to 2.9% in May.
1.8% in FY17E
1.3% in 2018E
According to the OECD’s June forecast, UK GDP growth is set to decelerate sharply,
from a (restated) 1.8% in FY16, to 1.6% in FY17E and 1.0% in 2018E; this is led by
private consumption which is set to decelerate from 2.8% in FY16 to 2.0% in FY17E and
1.1% in 2018E.
Car market has
decelearted since
2014…
Even before the EU referendum, the UK car market had been approaching the end of its
longest growth period on record. It had been driven by pent-up demand, easy credit,
aggressive marketing and a continuing economic recovery, with GDP up 2.9% in 2014
and 2.2% in FY15. Falling petrol prices, zero inflation and accelerating earnings growth
had turbo-charged consumer confidence to record levels and private consumption
accelerated from 2.5% in FY14 to 2.9% in FY15.
Weaker pound set to
trigger hike in sticker
prices
Going forward, in addition to private consumption decelerating sharply, the UK car
market is set to be affected by a weaker and more volatile pound and the ensuing hike
in car prices. Indeed, the UK car market is uniquely vulnerable to a weaker sterling as
almost 90% of LVs/cars sold in the UK are imported. Even locally produced vehicles
have a comparatively low domestic content.
-5.5% to 2.54m in FY17E We expect that the UK car market will start to decline, by -5.5% to 2.54m in FY17E,
after five years of growth. The change of road taxes for new cars is expected to
continue to hamper car sales in the short term. In the medium term, challenges include
Brexit and possibly tighter rules for car financing such as PCP (Personal Contract
Purchasing). The FCA (Financial Conduct Authority) stated its intension to launch a
review into finance packages offered to car buyers, due to concerns that there might be
‘irresponsible lending in the motor finance industry.
This document has been prepared by Creative Global Advisers (UK) LLP (‘CGA (UK)’) solely for the use of its clients and for purely informational purposes. It does not constitute or
contain advice on the merits of investing in any investment nor does it constitute or form part of a prospectus or any such offer or invitation to sell or to issue, or any solicitation of
any offer to invest in, any investment, nor shall it or any part of it or the fact of its distribution form the basis of, or be relied on in connection with, any such offer, invitation or solicitation,
nor constitute any contract therefore. Neither CGA (UK) nor any of its members or employees give any representation or warranty, express or implied, as to the fairness, accuracy,
completeness or correctness of any information or expressions of opinion contained in this document.
This document, insofar as it is distributed in or into the United Kingdom, is for distribution only to persons to whom the financial promotion restriction in section 21(1) Financial Services
and Markets Act 2000 does not apply by virtue of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (SI 2005/1529) (the ‘Financial Promotion Order’).
This document is directed at Investment Professionals as defined in article 19 of the Financial Promotion Order who have professional experience in matters relating to investments.
Persons who do not have professional experience in matters relating to investments should not rely on this document. The contents of this document have not been approved by an
authorised person. The distribution of this document in other jurisdictions may be restricted by law and persons into whose possession this document comes should inform themselves
of, and observe, any such restrictions. Any failure to comply with these restrictions may constitute a violation of the laws of any other such jurisdictions.

CGA - WE car market - June update

Recommended

Recommended

More Related Content

What's hot

What's hot (18)

Similar to CGA - WE car market - June update

Similar to CGA - WE car market - June update (20)

Recently uploaded

Recently uploaded (20)

CGA - WE car market - June update