#32 - The COVID Car Market

I had a truly delightful encounter with a customer in the week prior to the government lock down…..it made me feel all warm and fuzzy inside! Said gentleman, having enjoyed a spirited test drive in one of our cars and professing to liking it A LOT, informed me that he would not be purchasing the car right now as he felt that in a couple of months he would be able to come back and buy the same car from me at a markedly cheaper price……as I said, feeling all warm and fuzzy.

The thing is, as I smiled and waved goodbye to this lovely individual and tucked the car back in the garage with all its other brethren, I couldn’t help but think how many other “have a go hero’s” there were kicking around idly waiting for the moment they believed would provide the optimum chance to pounce on a floundering dealer and score the deal of the century….all in aid of being able to tell their mates down the pub what a car buying legend they were.

Well folks, hate to burst that bubble but allow me to shed some light on why they may be waiting a rather long time.

Like any tradeable asset class, the efficient functioning of its market is fully dependent on the ability to match buyers with sellers. It doesn’t matter whether it’s a Gallardo or a Gilt…..bid/offer needs to cross in order to transact.

Now the indisputable outcome of the current COVID-19 situation is increased market volatility globally and when you increase volatility, a number of things happen:

Firstly, liquidity dries up. What I mean by this is that given our risk adverse nature as humans, our appetite to transact is negatively correlated with volatility. In short, people feel more comfortable sitting on the side-line to weather the storm rather than going sailing in it. So if you are a buyer, you either stop buying completely (the really risk adverse option) or become more price sensitive and less willing to pay up (the slightly less risk adverse option). However, the bit that a lot of people miss out from this equation is the fact that sellers equally dislike uncertainty and are just as risk adverse. So like the buyers, they either stop selling completely or become more price sensitive and hold off selling at what could be an unattractive level in the long term. The bottom line…… the prices at which buyers and sellers are willing to transact diverge, bid/offer widens and ultimately less cars end up trading.

Now there are a couple of caveats to the above; WANTING to trade and HAVING to trade are 2 very different things. The above explanation of the market assumes no fundamental necessity to buy or sell….but what if people have to? If for example a fund has investor redemptions, they will need to liquidate positions in order to raise the necessary cash to make those payments. If a person loses their job and suddenly needs money to pay bills, maybe they will sell their house or more likely their car in the first instant to fund this. You suddenly have a situation where the risk adverse nature of humans is actually forcing them to sell. However, in my opinion, the scale of expected forced selling in the UK is being grossly over-estimated. Allow me to explain why;

The last couple of years have seen us stuck in Brexit paralysis; unable to make any real long term plans because the future for our fair country has remained relatively uncertain. As a result, both businesses and consumers have trudged along unwilling to make any sizeable investment in themselves until further clarity on the situation was achieved (which we had for a brief second at the beginning of 2020). That said, while the economy hasn’t been aggressively expanding, it also hasn’t been contracting with the UK’s annual GDP growth rate around 1.1% at the beginning of the year prior to the COVID-19 outbreak. What’s more, employment rates have been at record highs with the latest figures showing 76.6% of 16-64 year olds are employed. Again, these are pre COVID-19 figures but the point I am trying to make is the UK economy was not in a bad place going into this pandemic.

Then you need to look at Monetary and Fiscal policy. What is the central bank and government’s stance? Monetary policy in the recent past has been very supportive in the hope of keeping growth on a slow albeit positive track. In light of COVID, this has only been further reinforced with the base rate now at 0.1%. On the Fiscal side of things, the government has made it very apparent on their accommodative stance during this challenging time with a sea of rescue packages and grants the likes of which we have never seen before in post-war time Britain.

So you have a government who are willing to throw the kitchen sink at supporting and underpinning the economy which as I mentioned earlier wasn’t in a particularly bad place to start with against a pandemic which although devastating, is likely to be short term in the big scheme of things given the research we have and tracking the virus against other further along countries experiences.

Which brings me back to forced sellers; yes there will sadly be some people who NEED to sell and yes there will be some buyers who are able to benefit from this combined with lower market liquidity in order to snap up a very compelling deal on a car, house, sofa…..but they will be the exception and not the general trend.

Our view is that once the full lock down has been relaxed (1-2 months from now is our expectation) and a sense of normality is restored to people’s lives, there will actually be rampant demand for a lot of assets including cars. This is because if you are able to come out the other side of this dire situation with a business or job intact, financially you most likely will be in a similar position to where you were at the beginning of the year. You may not have been making a lot of money but you also won’t have been spending much. Furthermore, given the implications of longer term travel restrictions on international travel, its likely people will not be spending money on summer holidays which means guess what…..more money to spend on cars!! This will be further enhanced by low interest rates making it more attractive and cheaper for people to finance cars.

So yes right now it’s very easy to focus on the doom and gloom. It’s a horrific situation which you wouldn’t have wished on your worst enemy but in the immortal words of Thomas Fuller… it is always darkest before the dawn.

Stay safe and wash your hands,

Greg