Our Outperform expectation is even more compelling in 2016 given the spread widening that the sector experienced in the last six months, as the sector fundamentals remain strong. Another record year of auto sales is predicted and even if we do see declines from cyclical production peaks, breakeven profitability levels have been materially lowered, allowing both OEMs and suppliers to be highly profitable at cycle volumes well below what is forecast. The sector has engaged in prudent balance sheet management since the peak of the crisis; likely issuance (which will be biased to refinancing) should find more-than-adequate demand. M&A could inject some headline risk, and VW is still a wildcard that could cause a bout of spread weakness. We would see such volatility as presenting an opportunity, however, given the solid underpinnings of the Auto Sector storage.

The positive side of the sector's story is its still strong credit quality even if the group did see some modest deterioration on that from increased M&A and pockets of end-market weakness. They're not bulletproof, however, and there are still a number of sources of potentially negative headline risk that we expect to be at play out in the coming year. Additionally, even if the economy does perform to consensus. we expect the expansion will be reliant upon the US domestic consumption story and it will be heavier going in the global arena in which the manufacturing conglomerates compete, particularly as regards to economic performance in emerging market countries (most notably China). That, along with the comparatively tight level of prevailing spreads, limits the possibility for outperformance and constrains us from taking a more constructive stance.