Worse to come for European auto credit

The European auto sector is facing difficulties — no news there — and auto companies' debt is under pressure, with the index trading at a 17-basis point gap to the overall euro investment grade market, nearly its widest in five years.

This kind of widening, based on the costs of EV transition, intensifying Chinese competition, worsening affordability and tariffs, raises the question of whether or not it's a buying opportunity. Morgan Stanley offer a firm "no" in a note on Friday.

Their view is partly based on credit ratings. On their sums, fundamentals imply 2-4 notches of downgrades for autos that haven't been reflected by in ratings, as forward projections keep agencies on hold.

Markets have reacted a bit, but still are only pricing 1.5 notches of downgrades, just half of what MS think is justified, and that's why the broker maintains its underweight rating.

Interestingly, there's a bit of a clash within MS and their equity analysts expect a tactical bounce in auto stocks, as they reckon all the bad news is more than reflected in the share price.

If we get that, then credit spreads could narrow in sympathy, but that MS says would be a selling opportunity.

"We think the upside could prove temporary... (and) recommend investors use any summer strength to reduce exposure to the sector."

(Alun John)