HSBC: Lux­ury Growth Will Slow to 6%, But Don’t Panic

WWD Digital Daily - - News - BY SAMAN­THA CONTI

The bank sees sec­tor growth slow­ing from 9 per­cent in 2018 to 6 per­cent in 2019 and 2020.

LON­DON — HSBC’s ad­vice to lux­ury in­vestors? Be vig­i­lant, and don’t press the panic but­ton.

While the bank be­lieves the lux­ury sec­tor will slow this year, it said the trend will be soft rather than sharp, and that big names in­clud­ing Ker­ing, Mon­cler, Com­pag­nie Fi­nan­cière Richemont and Hugo Boss in par­tic­u­lar are look­ing at a promis­ing 2019.

In a re­port pub­lished Tues­day called “Ex­pect­ing the Un­ex­pected,” an­a­lysts An­toine Belge, Er­wan Ram­bourg and An­neLaure Bis­muth said they be­lieve sec­tor growth will slow from 9 per­cent in 2018 to 6 per­cent in 2019 and 2020.

HSBC said the 6 per­cent fig­ure cor­re­sponds to what it had al­ways es­ti­mated was the long-term, sus­tain­able av­er­age growth rate for the sec­tor.

“This is still ro­bust, and should al­low most lux­ury com­pa­nies to in­crease mar­gins fur­ther,” said the re­port, adding that growth is headed for a slow­down mostly be­cause “the in­dus­try has been oper­at­ing in a quasi-blue sky sce­nario for more than 12 months. All con­sumer na­tion­al­i­ties have been con­tribut­ing pos­i­tively to growth, which is not sus­tain­able.”

The bank pointed to a few com­pa­nies in par­tic­u­lar that should weather this year’s head­winds — and ap­peal to in­vestors, too.

It said LVMH Moët Hen­nessy Louis Vuit­ton has his­tor­i­cally proven re­silient in all types of in­dus­try down­turns, while at Ker­ing, con­cerns about Gucci’s higher fash­ion con­tent seem overblown. The bank said that Mon­cler still has po­ten­tial to open new stores and of­fers “best-in-class ex­e­cu­tion,” while Richemont “is strongly po­si­tioned in jew­elry and less vul­ner­a­ble in watches than in the past.”

It called Hugo Boss a “value stock with a re­cov­ery story,” and with lim­ited ex­po­sure to China. The bank, how­ever, wants in­vestors to keep an eye on Tod’s and Fer­rag­amo, “which are trad­ing at hefty val­u­a­tions dis­con­nected from weak fun­da­men­tals.”

HSBC said that on­go­ing, global eq­uity mar­ket weak­ness and trade ten­sions are likely to have a neg­a­tive im­pact on the feel-good fac­tor of lux­ury con­sumers in some re­gions. That said, “nor­mal­iza­tion” to 6 per­cent growth should be broad-based across all re­gions and na­tion­al­i­ties.

“While most in­vestors seem to be (overly in our view) fo­cus­ing on macro con­cerns po­ten­tially re­sult­ing in a se­vere re­duc­tion in Chi­nese de­mand, our soft-land­ing sce­nario is pred­i­cated on all key na­tion­al­i­ties spend­ing less than in 2018.”

HSBC said it ex­pects com­pa­nies such as Ker­ing, LVMH and Mon­cler, and to a lesser ex­tent Her­mès and Richemont, to con­tinue to out­per­form their peers.

“Specif­i­cally, we be­lieve Chi­nese de­mand should slow as the ‘feel-good’ fac­tor — at a his­tor­i­cally high level for most of 2018 — may be im­pacted by macro con­cerns. But trends should con­tinue to be sup­ported by long-term de­mo­graphic and so­cial fac­tors,” Tues­day’s re­port said.

The bank be­lieves that Ja­panese and Euro­pean de­mand, which is more ma­ture, is un­likely to stay at the high lev­els seen in 2017 and 2018. “The U.S. mar­ket re­mains un­der­pen­e­trated for lux­ury, but the ‘Trump bump’ ef­fect boost­ing lux­ury sales since early-2017 may start to wane, no­tably in [the se­cond half] after tax re­funds paid be­tween Jan­uary and April 2019 are be­hind us,” HSBC said.

The big­ger brands and lux­ury con­glom­er­ates will be the most in­su­lated from the neg­a­tive trends of 2019.

HSBC be­lieves the mar­ket will see a “flight-to-qual­ity” phe­nom­e­non, mean­ing that the stronger, big­ger brands such as Gucci, Louis Vuit­ton and Mon­cler will be less im­pacted than the weaker ones. In ad­di­tion, brand own­ers such as LVMH and Ker­ing will ben­e­fit from their greater abil­ity to in­vest on­line and in-store.

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