Active Thinking

At GAM Investments’ latest Active Thinking forum, two of our brightest investment minds discussed the recent market selloffs and evolving trends within the luxury sector.

13 December 2021

Mark Hawtin – Global Equities

While the new Omicron Covid-19 variant has been cited as the catalyst for the sharp reversal in parts of the market on 3 December, there are some clear changes to the dynamics that have dominated past selloffs. Over the last 18 months we have seen markets driven by news flow on the pandemic, interest rates and inflation. This has translated into some established relationships like re-opening versus stay at home, growth versus value or long versus short momentum. However, in recent weeks these relationships have dislocated as the market has faced the prospect of lower growth and greater virus risk without a corresponding policy response. In fact, the Federal Reserve’s policy response in particular has become more hawkish. This has caused a significant pick up in volatility and a sharp fall in investor risk appetite.

The effect of the more sustained risk off approach has been to challenge the extent of certain mini bubbles within the broader equity market. This has led to some eye watering selloffs in certain names and sub-sectors, notably on 3 December. In the software space, for example, blue chip names like Salesforce fell on a solid earnings print and shares in DocuSign fell significantly after guiding growth just 2% below market expectations. Many other segments of the market have been under duress of late, including special purpose acquisition vehicles (SPACs), e-commerce names and crypto markets. We expect to see ongoing high dispersion of returns to individual equities. With a more rational approach by the market towards valuation and risk, the environment is ideal for long / short investing and we see this continuing for the time being. More broadly, from a macro perspective, we expect the most important themes within Digital 4.0 (artificial intelligence, 5G, big data) to outgrow any slowing economic scenario.

Swetha Ramachandran – Luxury Brands

Within the luxury sector we are seeing a shift in both its predominant markets: China and the US. In China, the young consumer is driving growth. Globally, Millennials and Gen Z consumers make up roughly 40% of the sector’s demand today and are expected to account for 85% by 2035. However, in China, Millennials and Gen Z consumers are already the biggest spenders on luxury because numerically, they outnumber older consumers due to changes in Chinese life expectancy. These younger generations are also wealthier than their parents were at their age and have different lifestyles, different tastes and a high propensity for consuming luxury products. Meanwhile, the US is now being seen as an emerging market for luxury. Even though the US consumer has the highest income per capita globally, historically they have prioritised investing in their homes and cars rather than luxury items. But as younger consumers’ spending power increases, they are spending more on luxury. This cohort is also more interested in ‘buying less but buying better’ and investing in categories where they see an underlying investment appeal. We also see that the resale value of many categories such as luxury handbags and jewellery remains quite high, driving people’s consumption towards these areas and away from fast fashion.

The luxury sector has both quality and scarcity. As it is currently in a net cash positive position, we expect to see a spate of M&A activity in the next 12 to 18 months. The sector remains very fragmented and there could be a lot of value to add from consolidating brands. Interestingly, during the Covid-19 pandemic companies within the sector did a lot of work to cut costs, to trim capex and now that growth is moving more online we could possibly see capital intensity for the sector structurally trend downwards, which means cash flow as well as margins could be higher for these companies coming out of the crisis than they were going into it.