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Weekly Manager Views

12 April 2019

At GAM Investments’ Weekly Investment Meeting held on 10 April 2019 the speakers were Swetha Ramachandran, who provided an update on the exciting developments in luxury equities, and Davide Marchesin, who discussed the backdrop for global long / short financials.

Luxury Equities

Swetha Ramachandran

  • From an investor perspective, we believe luxury equities are an exciting space to be in. Long-term luxury demand is incredibly robust. According to data from the IMF, the compound annual growth rate for the global personal luxury goods market sector from 1996-2018 was 6%, outpacing eurozone and US GDP growth of 2.5% and 4.1%, respectively. In turn, we believe high compound growth ultimately drives high shareholder returns.
  • The past two decades have been very dynamic for the luxury market; short-lived lull periods of demand have been turned around by a wave of younger consumers – mainly Asian – entering the market. According to figures from the Brookings Institute, five people join the middle class every second in Asia and the global middle class could spend a further USD 10 trillion by 2022.
  • Circa 70% of the next billion additions to the global middle class are estimated to come from China and India alone. Secular trends here such as urbanisation and evolving demographics are significantly influencing consumers’ spending prowess and have been a boon to Western luxury brands. We are therefore seeing the entry point into the luxury market occurring at a much younger age in emerging markets. A younger, cash-laden, tech-friendly consumer is looking to ‘trade up’ – favouring premium products and experiences as a marker of social status. Given luxury’s growing appeal to a younger clientele, Environmental, Social and Governance (ESG) factors are an increasingly important factor in the production of luxury items.
  • Consumer spending is spreading from pure goods, such as handbags, towards luxury services and experiences – with high-end consumers the most targeted group for health and wellness-orientated companies, luxury travel and fine wines and spirits, among others reflecting the ongoing shift in taste towards ‘experiential luxury’.
  • We believe digitisation will be a key theme for the luxury space over years to come as younger consumers prefer to shop online in a more convenient manner rather than in the more traditional set up of ‘bricks and mortar’ physical shops. We believe luxury companies’ pace of digital adoption will be key in them retaining business from a younger clientele as time goes on.
  • We feel the incumbents within the luxury space still retain wide moats around them – effectively, barriers to entry in the established luxury industry remain very high and are hard to penetrate. The provenance and heritage of brands such as Hermes and Louis Vuitton cannot simply be replicated overnight, allowing these brands to invest for future growth and retain their market status as established, flagship luxury brands.
Global Financials Long/Short Equity

Davide Marchesin

  • The big development in the market environment in the first quarter of 2019 proved to be the US Federal Reserve (Fed) turning dovish. This was followed by an inversion of the US yield curve and together these prompted a sell-off in US banks during March, which we believe to be something of an overreaction. We believe fundamentals appear to be developing quite well and this is reflected in a number of metrics. Capital positions are around 40% stronger than 2007 levels. Funding positions are also healthy with loan-to-deposit ratios having fallen below 90% (the ‘sweet spot’ is 80-90%). In addition, net interest income is growing by around 10%, driven by loan growth and margin expansion, while credit quality is rock solid. As such, we anticipate the forthcoming reporting season could reflect a solid first quarter. We also favour the US regional banks as they trade at attractive valuations of 11x forward earnings. Therefore we are quite constructive on US financials.
  • Conversely, our stance towards Europe is much more cautious. Here, the economy is slowing down and the European Central Bank (ECB) has much less room to manoeuvre than the Fed in providing support; interest rates are already ultra-low and the ECB’s balance sheet is also much bigger than that of the Fed. In terms of the fundamentals of European banks, lending growth is very frail (circa 1-2%), while capital positions are much weaker than their US counterparts. Meanwhile, non-performing loan (NPL) ratios remain very high, particularly in the periphery. As such, we are circumspect, especially in Italy where NPL ratios are no longer declining. We favour Eastern European banks, where economies are stronger, lending growth is in upper single digits and profitability is high. We also maintain our positive view on European real estate in reflection of low interest rates and growing free cash flow generation. Areas of specific interest include residential real estate in Germany, the high-end office space in Switzerland and the downtown property market in Paris.
  • In the emerging markets (EM) arena we are quite selective, but are encouraged by the recent positive Purchasing Managers' Index (PMI) reading from China. Standard Chartered, an Asian player, which trades at an extremely attractive valuation of 0.7x tangible book value, this week reached a litigation agreement with the US authorities, which effectively removes a significant overhang. The firm’s loan growth is in mid-high single digits and we anticipate this will be reflected in a solid bottom line. We anticipate the company could announce a share buy-back programme by the end of the year. Other EM stocks of note include TCS Group in Russia, an online bank that is growing its loan book at 40% a year, and Hana Financial in Korea, which is trading at a very compelling 0.5x tangible book value and has solid credit quality.

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Source: GAM unless otherwise stated.
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development. Reference to a security is not a recommendation to buy or sell that security.