Back to bull market in luxury?
* Feedback during weeks of marketing highlights that many investors still wonder why luxury demand is rebounding
* Tug of war between valuation and momentum being won by the latter; we still see some challenges
* Short term, deals are in focus
Luxury demand is back. Weeks after our September 2016 luxury thematic report
(Panda-monium: How Chinese travellers are transforming consumption, 6 September
2016), our view that luxury demand would rebound has been validated. Many of the
psychological catalysts which dampened luxury demand – starting with the RMB
deterioration in August 2015 and including attacks in Paris in November 2015 – have
now been shrugged off. Every market, with the possible exception of Japan, is doing
better or in line with previous trends. After the US election and once we pass the oneyear
mark after the Paris attacks, these trends could get even better. Until the recent
concerns on curbs to travel, Chinese tourism to Korea was booming. Also, Hong Kong
luxury sales have seen an acceleration in the second derivative of growth. Meanwhile,
sales in the UK are strong following the fall in sterling (on price arbitrage), and mainland
China continues to do well.
Stocks rebound on news or on hope. Given threats to travel and geopolitical issues,
luxury stocks had been shorted by hedge funds and largely ignored by long only
institutions for many months. With LVMH, the bellwether, recently beating estimates and
Gucci and Saint Laurent within Kering posting strong growth, stock prices have been
quick to move higher across the board. Reversion to mean stories such as Prada and
Hugo Boss have benefited, while watch-driven companies Richemont and Swatch have
also seen strong performance on hopes of a recovery after inventory de-stocking. As we
highlighted in our Panda-monium thematic, however, we see challenges facing the watch
sector including price cuts and high inventories.
Investors asking about a wave of consolidation. When asked “what brands will be
taken out” we point out that many of the higher quality assets in luxury are familycontrolled
and profitable (e.g. Chanel, Patek Philippe, Audemars Piguet, Chopard,
Armani). We noticed increased interest in this theme following LVMH’s recent acquisition
of German luggage brand Rimowa. Note that the size of the deal is not significant, and,
as discussed in our recent Samsonite update, reflects our bullishness on travel being a
decades-long investment theme ahead. There were reports that Coach may take over
Burberry (Bloomberg on 21 October 2016) but we would caution that M&A in luxury
usually generates very limited synergies and that companies tend to buy small to grow.