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Vehicle restocking enters the fast lane

The 1.27 million new vehicle inventory is the highest level since June 2021. According to BofA Securities, this translates into a days’ supply (DS) of 29DS, which is ~37% below the five-year average of 47DS and up from 27DS in July. The magnitude of the inventory shortage serves as a reminder of the challenges and hurdles faced globally by the automotive companies and their suppliers, impacting consumers and businesses across the eco-system. New technologies, safety systems, and new powertrains are just a few of the many drivers of the sustained demand. We believe the secular growth outlook over the mid to long-term in the mobility theme remains very attractive for auto-related holdings. Areas such as advanced driver-assistance systems (ADAS) and electrification remain places for potential above average growth over the mid to long term. ADAS content and functionality per vehicle continues to increase in key markets, as does the underlying secular shift to vehicle electrification, which remains a key focus for Europe and China due to emission policies and regulation.

During August, the US seasonally adjusted annual rate (SAAR) was 13.4 million, which was relatively flat compared to July’s 13.5 million. These levels are what is typically seen in a recession, but the supply chain has meant shortages of vehicles. We continue to believe demand remains above supply. Looking at 2022, we believe it could achieve growth of 10 to 15% year-on-year, assuming there is not a consumer recession. Inventory restocking could accelerate as supply-chain bottlenecks ease.

Similar to the US market, Western Europe could be attractive once production normalizes. However, the Ukraine-Russia conflict is a material risk to the macroeconomic outlook in Europe. There is also the risk of energy rationing in Western Europe, particularly in Germany, due to the risk of lower Russian natural gas supplies. This may negatively affect many industries that are energy intensive such as steel, chemicals, and to lesser extent the auto industry.

Newton Mobility Team

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