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Weekly Manager Views: Equities

05 August 2020

At GAM Investments’ Weekly Equities Meeting held on 4 August, Swetha Ramachandran provided an update on the luxury sector’s recovery, particularly in China.

The second quarter was more of a barometer for the luxury sector than Q1, when the store closures were primarily restricted to China. Q2, when stores were closed around the world, was the absolute worst of times for luxury brands. The nature of the store closures was fairly uniform across Western Europe and North America, with little variation between the stronger and weaker brands. The e-commerce presence for many of these brands was not strong enough to improve their declining sales throughout the period. Gucci, considered a prestige brand, saw its sales down 41%, while the considerably weaker brand Ferragamo was down 52%.

Even during the Global Financial Crisis, the entire luxury sector’s demand only dipped by 10% in 2009, with a strong rebound the following year. The question now is, will our current decline also be followed by the best of times? The companies have expressed a fairly unanimous view that this crisis is a supply crisis, rather than a demand one. Companies ranging from Ferrari to Hermès have highlighted that demand has remained robust, particularly for clients in China and North America. The evidence from mainland China, where stores were open during Q2, is that consumers are back with a vengeance; “revenge spending” appears to be a real phenomenon. Fashion and leather good sales were up by over 60% in the quarter. Meanwhile, Tiffany reported sales up 90% in May in China alone, and Nike, despite being a more wholesale brand, returned to growth six weeks earlier than expected in mainland China.

While the downturn affected brands on a fairly uniform basis, the bounce back is differentiating between brands based on their reactions and reputations. In times like this, consumers tend to prune their shopping lists and go to the brands they know the best. Going into the upturn, we believe the polarisation of performance that we saw pre-Covid will likely re-emerge, further separating the winners and the losers.

It does appear that we are past the worst, with the decline of Q2 anticipated to moderate in Q3. Prada has reported only a single digit sales decline in July, a remarkable rate of recovery compared to previous months. A company like Ferrari, which is very supply-led, has noted that order books have increased by double digits in July. The key is to wait and see to what extent this will be sustained. Categories like high end jewellery, as well as leather goods, will likely stage a strong return, because these are items purchased at a low frequency, and therefore they could benefit from pent-up demand. Apparel, conversely, is a high frequency item that might suffer due to missed purchasing opportunities.

35% of the sector’s demand consists of Chinese consumers. Just over half of this figure is consumed by Chinese tourists outside of the mainland. As a result, we are seeing a massive growth of luxury consumption within China, as consumers are not able to travel internationally. Overall, the stronger brands have made highly differentiated efforts in improving their e-commerce footprint, in comparison to the weaker brands. 50% of L’Oreal’s sales in China are now online, led by initiatives such as live-streaming. Pre-crisis, online was 7-8% of the sector’s sales, and we would anticipate this figure to double after the crisis.

Important legal information
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. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. Reference to a security is not a recommendation to buy or sell that security. The companies listed were selected from the universe of companies covered by the portfolio managers to assist the reader in better understanding the themes presented. The companies included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. August 2020.


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