#42 - 2023 Predictions

There is very little to wax lyrically about when it comes to 2022. What started as a year of post-pandemic hope with normality returning and the world begrudgingly beginning to function as it once did, we quickly found ourselves plunged into another horror story with a lunatic in Russia taking it upon himself to advance a hostile, unprovoked and completely deplorable assault on neighbouring Ukraine.  

Unsurprisingly, a military conflict so close to western borders threw financial markets into turmoil as the resulting uncertainty combined with associated supply chain issues became a major headache for a still very fragile global economy…..and we thought Tory garden parties would be the biggest scandal of the year.

Anyway; 3 Prime Ministers, a 1,100% increase in the Bank of England Base Rate and a 10.5% devaluation in the pound (with a Pension crisis narrowly avoided) later we end the year. Alas, when life throws you lemons…..make lemonade.

There are some huge implications from all of this for the UK car market, both mainstream and investable. The substantial increase in the cost of borrowing should have seen a huge impact on mainstream car valuations. In a market where over three quarters of cars sold are done so on finance, if borrowing costs rise by over 30%, isn’t it fair to assume an equally large correction in the value of the underlying assets being financed? Well yes and no. While the raw material supply shortages continue, the consequential new car supply also remains muted meaning that demand (even in a recessive environment) can still comfortably outstrip it. So yes, while valuations are a little weaker, they are supported by ongoing supply chain issues.

The interesting talking point surrounding this for 2023 is that as/when new car supply can return back to pre-pandemic levels, whether major manufacturers will artificially manipulate it to remain restrictive. You only have to look at the massive markups over MSRP (list price) of new cars in the US by OEM dealers to see how profitable it can be for them when supply remains limited.  In the UK, a prime example of this can be seen in the price of nearly new Range Rovers. This is a car that in pre-pandemic times would lose anywhere from 25%-30% of its value the second it drives off the forecourt.

My major concern here continues to remain around overleveraging especially as we move into a recessive period. Lenders financing sub prime borrowers on assets with the potential for huge negative equity is a very real situation that the market doesn’t want to talk about at this moment in time……Ostrich…. Head…… Sand comes to mind.

Looking at the investment grade/collectable side of the market, we continue to see large opportunities as we move into 2023. While this portion of the market doesn’t share the same leverage profile as the mainstream car market, it is at the same time not impervious to the themes playing out there. In the last 2 months we have seen a small decline of around 1.4% in the valuations of European Modern Classics (source: Contemporary Classics CC30 Index). In the main, this has come from declines in the values of certain benchmark Ferrari and Porsche models.

Moving forward, we expect to see relatively muted growth in valuations over the next 12 months as the market digests the impact of inflation and the cost of living which will likely be felt the hardest over 1Q23. Our view is that as we move into the spring and summer, better clarity on the path moving forward (even if inflation persists) will provide the necessary comfort for participants to step back in. That said, in our opinion, it is right now and over the next couple of months which has the potential to offer up some very exciting opportunities.

So what are we focusing on as we move into 2023?

We continue to see much opportunity within modern classic BMWs. The BMW 1M Coupe is a car we have long championed. In a world where manufacturers seem to insist on making their cars larger and more bloated, the 1M acts as the true antithesis to this. An end of production run, parts bin special which led to possibly one of the greatest BMWs ever to be produced. Brakes and suspension components borrowed from the M3, a modest power boost and most importantly, a mechanical locking limited-slip differential.

It was and remains a brilliant driver’s car however the market is massively mispricing its intrinsic value. In a world where a good, low mileage (sub 20k miles) E46 M3 CSL is costing you comfortably north of £100k now, a similar quality 1M is half that price. From a rarity perspective, only 450 1M’s were produced for the UK market versus 422 CSL’s. The spread between these two M cars is simply too large and given the lacklustre M4 CSL recently released along with frankly ridiculous new 3.0 CSL, I don’t believe we will see E46 CSL values falling anytime soon.

If you need a naturally aspirated, straight six BMW in your life, investors still appear to be hoovering up anything with the iconic S54 powertrain. In the main, this has seen big appetite for standard manual E46 M3’s however an interesting and slightly cheaper alternative can also be found in the E86 Z4M. Retaining the S54 powertrain, good Z4M coupe’s are trading at a £20-25k discount to equivalent E46 M3’s which again feels a little too cheap given the performance and driving experience they offer.

Moving away from Bavaria, it wouldn’t be a CC predictions if we didn’t touch on a firm favourite, the Renaultsport Clio V6. It was an another exciting year here for the V6 as values continued to rally and we achieved record breaking sales for both Phase 1 and Phase 2 cars. Unsurprisingly, the market is now taking a breather and we expect valuations to tread water for the next couple of months. That said however, one of the big aspects which people seem to be missing at the moment is supply of good quality examples. Given the amount that have changed hands over the last 12-24 months and are now tucked away in collections for the foreseeable future, good examples are becoming few and far between. So if you are still thinking about buying one, move fast as you will be paying a whole lot more once people catch wind of this.

In a similar vein, Renaultsport Megane R26.R’s have become increasingly desirable and with only 159 UK supplied cars, equally challenging to source good ones. With low mileage examples now trading north of £40k, we expect to see values of these incredible little cars continue to climb.

I alluded earlier to a fall in values in recent months of certain Porsche and Ferrari models. Interestingly, one of the larger movers has been the 997 iteration of GT cars both GT3 and GT2. A stalwart for bulletproof valuations historically, the “Mezger Trade” may well be experiencing some headwinds at the moment but we still believe there is big value in these cars in the long term. We continue to focus on 997.1 GT3 RS examples as they trade too cheap to the later 997.2 gen 2 variants.

Within the Italians, the beautiful Ferrari 599 GTB remains a magnificent V12 powered bargain. If you can find a well-cared for HGTE example you are onto a winner especially when you consider 599 GTO valuations. You only need look at 550 and 575 values to work out what is about to happen here.

So to conclude, 2023 is on paper shaping up to be a challenging year for all asset classes both conventional and alternative. That said, it also brings with it much opportunity for those willing to brave the elements. We continue to remain bullish on modern classics even in the prevailing interest rates environment and see any pause in value appreciation as a temporary one.

Happy Motoring,

Greg