Luxury stocks navigating troubled waters with wind in their sails

Underpinned by the resurgent demand from Chinese consumers as the prolonged COVID restrictions continue to ease, the outlook for the sector remains strong. In an article first published in the Financial Times publication, Professional Wealth Management, we explore the outlook for the luxury sector, with a specific focus on our holdings in the J. Stern & Co. World Stars Global Equity Fund.

One of our team members was in Beijing earlier in the year.  It was their first visit since the pandemic was declared three years earlier and they couldn’t but notice how the city was bustling.  All the signs were that China was returning to normality after its lengthy lockdown. Public transport was busy, roads were jam-packed with cars, shops were open as normal, and restaurants were full of diners.

During nearly three years of COVID restrictions, Chinese consumers accumulated significant excess savings.  Some analysts have estimated that up to 12 trillion RMB (equivalent to 10 per cent of GDP) has been saved by consumers during the pandemic.  With the re-opening, these excess savings are being unleashed, as experienced in the US and Europe when restrictions were lifted.  The re-opening is fuelling spending on discretionary goods and services, travel and cross-border duty-free shopping. Luxury goods companies like LVMH and Hermès are major beneficiaries of these excess savings.

LVMH has long been a major holding in our flagship World Stars Global Equity Fund, and it will continue to be despite its share price drifting lower in recent weeks.  There are widespread concerns that the post-pandemic economic recovery in China is faltering.  There are numerous challenges and recovery is never a straight line.  Everybody likes to call a bottom but in our view, these concerns will prove short-lived and the market is underestimating the breadth of levers at the Government’s disposal to support the economy through stimuli programmes.

The challenges to companies doing business in China include geopolitical instability, with Taiwan and Russia of particular concern, and tensions with the US and Europe.  Much has also been said about China’s high youth unemployment, but we believe this is cyclical rather than structural.

China is emerging from three years of lockdown and the economic recovery post re-opening has been uneven and below expectations.  It is not a surprise that employment growth is slow, with a wave of new graduates leaving university this summer compounding the problem.  However, following a flurry of government measures to re-ignite economic growth, in late August, we believe the trend will correct itself with better GDP growth in the coming quarters.

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