“Usually we say that nine out of ten surprises in our market tend to come from companies in the high yield sector, so when we have one from a single A rated corporate with such global reach, it is sure to attract attention,” Holman said.
“This surprise was pretty much impossible to predict but luckily we did not hold any VW bonds anywhere in our portfolios. The reason for not holding any VW was solely due to our view that the bonds were just too expensive. Nothing to do with company fundamentals which were completely sound.”
“Now however the bonds are generically 10 points cheaper which represents around 150bp more in yield,” Holman continued. “Hybrid, subordinated bonds are down by up to 20 points. They are definitely cheap enough to consider now but we feel the risks are still just too high for fixed income investors at this stage, despite the damage that has already been done to prices,” he said.
Smith & Williamson’s European equities manager Giles Worthington says Volkswagen is not quite a buy for him because there could be weeks and even months of volatility as the scandal unfolds fully, but there are reasons to be very optimistic the company can ride out the storm.
“Of the 11 million cars involved only 500,000 were sold in the US,” he noted. He also gave a nod to Volkswagen’s strong balance sheet, and the fact that being a major employer in Europe it is key to the economy, so authorities will be reluctant to clamp down too hard.
Overall it seems it could be a rollercoaster few weeks but ultimately when the headlines fade away the quality of the company will see it through.
