Word on the web: Fight or flight?

After Volkswagen’s recent emissions debacle led to a sharp fall in share prices, with more repercussions to follow, should investors run or sit tight, and should VW be Very Worried?


Volkswagen is the world’s biggest selling car maker, which made the recent revelations that it manipulated diesel emissions tests in the US all the more shocking. The US Environmental Protection Agency has ordered the company to recall 500,000 cars, its share values have dropped 34%, and there are concerns that this deception may extend to other markets. Experts have been wondering if Volkswagen can ever recover its reputation.

There's more to come Investment Week thinks that further repercussions for Volkswagen are on the way. With the manufacturer’s CEO, Martin Winterkorn, resigning over the scandal, and the company setting aside €6.5bn for legal costs, there is the opinion already that such contingencies will not be enough.

Mark Holman, CEO of TwentyFour Asset Management, compares the events to the BP oil disaster in the US, with “law suits, criminal actions, board level firings, rating agency downgrades, stock price revisions … brand damage, increased financing costs, and removal from SRI indices” all part of the fallout.

A European equities manager at Old Mutual Global Investors, Kevin Lilley, expects the scandal to be felt by the rest of the motoring industry, and to dent confidence in the sector in the short term. But when the buying public recovers, Volkswagen’s likely loss of market share will be “to the benefit of other sector players”.

Investment Week article

Paying the price Writing in The Telegraph, Tim Wallace reports on how Volkswagen’s investors have reacted. The European Central Bank is believed to have stopped buying the car manufacturer's bonds, which were an important part of its quantitative easing package, with private investors also turning their backs.

“Earlier in the year, Volkswagen could borrow long-term funds for as little as 0.7%,” says Wallace. “Now the yield on those bonds is up to the 2.3% mark, indicating that investors believe the company is a riskier bet.”

Wallace also explains how credit default swaps – insurance against getting into difficulty and being able to repay debts – have increased dramatically for the manufacturer, with warnings that “the situation could worsen”. Major credit ratings agencies have hinted they may cut Volkswagen’s score, which would again affect the interest rates when borrowing.

He concludes his piece with news that Switzerland has banned the sales of all cars involved in the US emissions tests, with the company withdrawing them in Italy.

The Telegraph view

Snapping up shares Panos Mourdoukoutas, writing for Forbes, wonders if the huge drop in Volkwagen’s share prices should be taken advantage of, with speculators buying low in the hope that figures will rise again once the situation dies down. But he warns about getting carried away, as the full extent of the scandal is not yet known.

As well as the repercussions the car manufacturer can expect, including “government penalties, immediate remedies to customers who have already purchased Volkswagen diesel vehicles, and loss of future sales”, there are also the effects of a “slowing global economy, which is expected to hinder vehicle spending”.

Volkswagen may have a long way to go in terms of working towards its recovery, especially as there will be more challenges arising, some of which have not been fully realised.

Anyone hoping to invest in the motoring industry is perhaps better off looking elsewhere, with Mourdoukoutas citing Toyota Motor Company as a perfect example: “[It] is still less expensive than Volkswagen in terms of next year’s earnings, and enjoys better operating margins.”

Forbes opinion

Seen a blog, news story or discussion online that you think might interest CISI members? Email joanna.lewin@wardour.co.uk
Published: 02 Oct 2015
  • The Review
  • investors
  • Europe
  • Ethics
  • integrity and ethics
  • Word on the web
  • integrity
  • investment

No Comments

Sign in to leave a comment

Leave a comment