* Cutting 2016E European growth forecast to 1.5%. We maintain our
negative view on the sector, as we expect growth in Europe to fall
meaningfully short of expectations. We cut our 2016E market forecast to
1.5% (from 2.5%), which is substantially below market expectations of 5-8%
growth. Our below consensus view is largely driven by slowing fleet volumes
(in particular Germany and UK), which were the main driver in 2015.
Regionally, we see the biggest downside risk for Germany and the UK,
where we expect to see falling volumes. FX (Euro weakness) remains the
key upside risk to our estimate. Within the sector FCA (OP) remains our
preferred name.
* Fleet operators likely pushed forward demand. Fleet operators/leasing
companies are key drivers for car sales, in our view. Solid residual values
(enabling windfall profits) and low financing rates (shortening of duration)
enabled impressive improvement of industry KPI's. However, it also
exaggerates the volume development and pushes forward demand. Limited
upside to reduce duration further combined with a more challenging pricing
environment likely to end the cycle in 2016. VW emission scandal could add
further uncertainty on values of used cars (additional to UK price weakness).
* Germany and UK expected to decline in 2016: Our negative expectations
for Germany (-3.1%) and UK (-1.8%) are a key pillar for our bearish 2016
market outlook. Quality of German growth was already poor in 2015 since
volumes were boosted by self-registrations, which showed the first signs of
weakness recently. Increased off-lease volumes likely to dampen new car
sales further in Germany. UK negative growth in October (first time since
2012) unlikely to be a one-off given that used car pricing is also increasingly
under pressure. Within Europe Italy looks the strongest.
* Currency (Euro weakness) key upside risk. Currency development (Euro
weakness) remain the key upside risk to our estimates. We make moderate
adjustments to our forecasts as lower organic growth is offset by FX. Our
2016 estimates are c.15% below consensus expectations.