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Global Automotive-Industry Outlook Softer but Still Appears Solid in 2019

Light-vehicle demand is likely to remain strong, barring Brexit and trade conflict

Richard Hilgert

 

Global light-vehicle demand in 2019 is expected to hinge on whether two significant matters come to fruition: a no-deal Brexit, and international trade war.

Barring these events, we expect global light-vehicle demand to moderate in 2019, remaining flat or declining by a slight 3%. But global automotive-market demand could be subject to substantial declines if a no-deal Brexit causes a recession for Europe and the United Kingdom, or if an international trade war arises.

Morningstar Research Services’ equity analysts expand on these forecasts and more in the latest “Automotive Observer.” Below, explore some of their key takeaways about the future of the global automotive industry.

United States demand remains strong for 2019 

With U.S. demand at a plateau, the light-vehicle market is expected to be flat to down 3% in 2019. Current sales levels are still robust even though they are not meaningfully growing. 

This slow growth is likely due to factors such as low unemployment, healthy credit access, and little evidence of a subprime auto-lending bubble (although delinquencies over 90 days are rising).  

Plus, November 2016 data from research firm IHS Markit indicates about 23% of the fleet is at least 16 years old and will likely bring about numerous replacements in the near future. Cheap gas prices can often motivate people to trade in these older vehicles (the average U.S. model year is a 2007) for newer ones that provide state-of-the-art technology and safety features.

Top EU market drivers: new emission standards and a possible no-deal Brexit

European volume also remains at a plateau, with demand in a range of negative 1% to positive 1%. One phenomenon playing a large role in the European market was the September 2018 implementation of the Worldwide Harmonised Light Vehicle Test Procedure, which created market distortions that resulted in aggressive pricing and lack of availability of noncertified models.

With regards to Brexit, our projected worst-case scenario assumes a recession that results in a 35% cumulative decline for U.K. light-vehicle demand and a 20% cumulative decline for the EU27 member states. For now, despite the possibility of a no-deal Brexit, European labor markets remain healthy and support flattish year-over-year light-vehicle registrations. 

Overall global demand remains healthy 

Despite headwinds, the global automotive market has an overall strong outlook:  

  • Chinese demand is expected to soften in 2019, with light-vehicle registrations down 1%-3% as comparisons ease in the second half of the year. 
  • In Japan, demand is expected to increase 1%-3%. This is due to expected purchases ahead of a consumption tax increase (from 8% to 10%), set to take effect in October 2019.  
  • The Indian government passed monetary and tax reform actions in 2017 that spurred light-vehicle demand (especially through the first half of 2018), and a full-year increase of 8.3%. However, we expect tighter credit policy to dampen light-vehicle demand growth to 6%-8% in 2019.  
  • The Brazil light-vehicle market saw a 13.7% increase in 2018 due to labor reform and favorable monetary policy. In 2019, though, political turmoil and unpopular pension reform could be significant risks to growth.  
  • Russian light-vehicle demand is expected to increase 6%-8% in 2019, in the face of economic sanctions imposed by the international community and moderating oil prices. 

These circumstances suggest that demand in the world’s major markets is likely to soften moderately but remain relatively healthy, as long as they aren’t subjected to a no-deal Brexit and trade-conflict escalation.  

These insights lead us to conclude that automotive companies may potentially generate solid profits and returns for investors, albeit at slightly softer levels than in 2018.

For the full analysis of the global automotive industry, download the latest “Automotive Observer” report.

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The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. 

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