Are classic cars riding into the sunset?
- Whether due to holidays or a more general ennui setting in, the period after Easter has been especially quiet in markets. FANG stocks have been rallying like it’s 2017, and the Fed’s snappy patter about inflation only being transitory has been on loop pretty much every day. All a bit soporific.
- A time perhaps to reflect on what the future might hold. Given that a green destiny for the auto industry seems pretty much a dead certainty now, this means the switch from the internal-combustion engine (ICE) to an electronic power system is just a matter of time. The transition will likely take longer than expected due to production and raw material constraints, not least in terms of copper, the key element for electronic vehicles (EV).
- More generally though, the performance car market is not one where utility is necessarily high on the agenda. Take a look at YouTube videos of people trying to parallel park a Lambourghini Countach if this were in any doubt. While looks aren’t affected by what’s under the bonnet; nonetheless, the sound of the exhausts and the throb of the engine are integral parts of the supercar experience.
- This is worth bearing in mind when one considers that the chairman of Ferrari (ticker RACE.US), despite some historic reticence over the matter, announced at the company’s AGM on the 15th April that Ferrari would release its first all-electric model in 2025. Doubtless the car will still be red and very shiny, but Tesla has got there first with ‘insanity mode’ acceleration. Jog on.
- As an asset class, classic cars have done terrifically well over the past twenty to thirty years. The graph below courtesy of K500.com shows price appreciation in the various parts of the classic car market over the last three decades. The green line at the top shows pre-1958 Ferraris (the ones with noisy petrol engines) which are up over 800% since 1994, which is a little more than Tesla stock managed in 2020.
- But it’s not just the really fancy high-end classics which have done well. The last decade or so has seen a wave of nostalgia for the cars of the 1980s and 1990s, and a corresponding rise in their value as would-be owners have bid up prices. Despite movement restrictions in lockdown in the past 12 months, there appears to be a strong degree of nostalgia inflation for 1980s classic cars, resulting in prices spiking dramatically.
- An article in the Daily Mail investigates the phenomenon in more detail (‘Race-bred cars that rocketed in value in the pandemic: The 80’s and 90’s modern classics that have been selling for incredible sums in the last year’, Daily Mail, 12/04/2021). Top of the price-appreciation list is the Ford Sierra RS Cosworth, which in March 2021 would change hands for £48,550, or £20,200 higher than 2019.
- A lot of strange things have been happening in the investment world since the pandemic begun, but a rally in mid-range 1990s classic cars seems particularly odd, especially since the lockdown means you can’t really travel that much. Then again, the Ford Cosworth may be the Dogecoin to the Ferrari Bitcoin, and a rising bubble raises all boats.
- Part of the logic of the classic car market, especially since the high insurance rates (which often involve strictly limited mileages) means the cars are rarely used as runabouts, is that any utility value has been depreciated away and what is left is a collector’s item. The serious sums of cash involved means these are long-term investments, albeit with the opportunity for the odd track-day outing. The less you use them, the better they retain their value – mileage matters.
- If one is a long term investor here, one has to have noticed the general direction of travel with respect to ICE-cars and the likely policy responses which we are going to see which inhibit the use of petrol and diesel cars in the future. This will be true even if the ICE-to-EV transition takes longer than is currently indicated by politicians (which is very likely given the production constraints mentioned earlier).
- To work out a scenario about what classic cars like our Ford Cosworth will be worth in say 20 years’ time, an exercise in counterfactual analysis is necessary. According to the philosopher David Lewis, counterfactuals generally fall into two categories, those of necessity (if X were the case then Y would happen) and those of possibility (if X were the case, then Y might happen). Given that government policy on the future legality of ICE-vehicles has yet to be detailed in full, the possibility operator seems the appropriate line of investigation.
- If we were to create a scenario today in which we envisaged that in 20 years’ time, ICE vehicles would not be road legal or that they were so heavily taxed that driving them was only an option for the ultra-rich, then clearly the wisdom of owning a mid-range classic today seems questionable. On a more prosaic level, if one imagines that in 20 years’ time petrol stations have become charging centres, then actually filling up one’s tank might be an extremely difficult task, making ownership of ICE vehicles extremely impractical.
- This is the key to the counterfactual with respect to working out what value there is in a classic car today given the possible restrictions on actually driving one which may present themselves in the future. Answering this question reveals much not only about what we value but the sort of timescale we employ when valuing things, especially for the long term.
- Unlike antique furniture or a set of silver cutlery which still maintains some utility as well as being a store of wealth, a high-powered mid-engine saloon without any petrol or which isn’t street legal is basically as much use as keeping a one-tonne paperweight in the garage. Lacking the alure and scarcity value of the pre-1958 Ferraris in the K500.com classic car index mentioned above, it really doesn’t have a lot of value at all. This is perhaps ironic given classics are generally not bought to be used, yet their original purpose (to be driven) is still they key measure for how we ultimately value them. Perhaps this is the flaw in the investment, but only so because of the direction of public policy towards lower emissions and electronic vehicles.
- It is common to describe some investments as having ‘intrinsic’ value, as though there is an additional quality to the object (or instrument) beyond that which we use it for or for which it is designed. In the example of classic cars discussed here, it would appear there isn’t much intrinsic value (although there may be some sentimental value, but that is hard to put a price on). The question remains about who decides what has intrinsic value, and how it differs from other measures of worth.
- The answer may come in terms of cashflows. If one looks at Ferrari stock below, at $211.11, the company trades on a 42.5x Dec 2021 P/E ratio. As a high margin luxury company (37% EBITDA margin FY 2020), it can command a premium to book – in this instance Ferrari trades on 21.8x FY 2020 book value. Clearly the market believes the company has value, intrinsic or not. If the brand continues to perform at a high earnings margin, the premium valuation can be maintained. This is regardless of where interest rates are while the discounting of cashflows to the present is clearly important, one needs first to earn the revenue and make a profit before one can discount it into the future.
Source: Bloomberg, 15th April 2021.
- If one states that things are simply valuable because we value them and nothing else, the current interest in the classic cars of the 90’s, an investment trend we seems to be at odds with environmental policy and the likely direction of motoring policy, then what one is really saying is those who are willing to part with large sums of cash for are really assuming that tomorrow is going to be like today forever. The wisdom of this is questionable.
- The problem is, as with many things, that when one is forced to revalue things, it is often the case that everyone happens to make the same decision at the same time, and therefore there tends to be no bid in the market if everyone turns seller simultaneously. This is essentially why markets can crash. If ICE cars with certain emissions levels are suddenly no longer road legal, then you can be pretty sure that there will be a lot of supply hitting the market. In this instance, who would be the buyer and why?
- This may show how suitable Ford Cosworths really are as a long-term store of wealth. But that’s not really the point is it – the nostalgia angle is clearly a psychological one about people in lockdown, harking back to a time when they weren’t stuck at home for a year with the kids and having to work from the sitting room. In this context, what might the long-term price prognosis be for other assets which have gained the investing attention of those yearning for freedom from lockdown.
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