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Saturday, Apr 20, 2024

Forget FAANG, it's all about LVMH

Forget FAANG, it's all about LVMH

To most investors, navigating today's stock market is as treacherous as walking the plank. But for luxury investors, it's more like strutting down the catwalk.

The United States may very well be hurtling toward a recession and the Nasdaq is suffering its worst 100-day performance on record. But luxury spending is up 14% year to date, according to Bank of America aggregated US credit & debit card data.

In short: Our weekdays are filled with photos of traders holding their heads in their hands at the New York Stock Exchange, and our weekends have been filled with photos of Kanye West and Balenciaga models stomping through the narrow alleyways of ... that same exchange.

"Money is probably the biggest fetish in the world," said Demna, the creative director of Balenciaga, while backstage at his NYSE fashion show last weekend, The luxe fashion house is now selling NYSE-branded shirts for $800.

And why not? US luxury spending was 47% higher in 2021 than in pre-Covid 2019, while jewelry spending was 40% higher, according to Bank of America data. General stock market chaos isn't a headwind either, they say.

"We believe that many investors think that US luxury demand is highly correlated to stock market performance as a large proportion of household wealth is tied up in this asset class," wrote Bank of America analysts in a recent note. But that's far from the case: The bank's data showed that in the 10 years prior to Covid, the correlation between luxury spending and the S&P 500 was less than 30%. There was no correlation at all between the price of cryptocurrency and luxury spending.

"Very strong demand from US luxury customers was the biggest positive tailwind in 2021. The strength has continued in 2022 despite a more complex macroeconomic backdrop. Higher-income consumer demand for luxury is accelerating, which we attribute to reopening and more purchase occasions (return of weddings, galas, holidays, etc.)," they wrote.

If there werea Walmart vs. Weitzman matchup today, the luxe shoe brand would take the belt. Walmart and Target have felt the brunt of rising inflation and supply-chain kinks.

"US inflation levels, particularly in food and fuel, created more pressure on margin mix and operating costs than we expected," said Walmart CEO Doug McMilon after the company posted weaker-than-expected first quarter earnings and cut its full-year profit forecast last week.

Walmart stock is down more than 18% for the month and Target is down nearly 30%. By contrast, Moet Hennessy Louis Vuitton (LVMH) fell just 5.6%, Burberry is up more than 8% and Tapestry, the company behind Coach, Kate Spade and Stuart Weitzman, has grown by more than 2%. The S&P 500 is about 3% lower for the month.

As the West presents some good news for luxury brands, China's Covid-related shutdowns, however, have caused some concern. China's strict containment measures in response to the latest surge in Covid have shuttered luxury stores and left goods intended to be shipped around the world stuck in Chinese ports. But increased demand in the US and Europe has offset those losses, said Ferragamo CEO Marco Gobbetti during a recent conference call.

The second quarter is also less exposed to Chinese consumption because there's less travel and less important shopping holidays, giving luxury brands some breathing room as Asia begins to lift restrictions again. The hope is that by the third quarter, Chinese consumers will revert to "revenge shopping" from pent-up demand during lockdowns.

Still, luxury stocks are priced as though they're in recession, wrote Bank of America analysts. "The luxury goods sector continues to come under pressure now as a result of the rising Covid cases in China," said the note.

There have been six prior pullbacks of the luxury industry over the past two decades: The 2000-2001 dot com bubble, the 2007-2009 global financial crisis, the 2013-2014 Chinese anti-corruption campaign, China-US trade hostilities in 2018, the Covid pandemic; and China's Common Prosperity announcement in 2021.

Those pullbacks have grown shorter and less severe over time. The first three pullbacks, on average, resulted in a 52% decline peak-to-trough over 85 weeks and took 119 weeks to recover back to the previous peak, BofA analysts found. But the last three pullbacks declined just -22% on average in 8 weeks and took only 20 weeks to recover back to previous highs.

If the patterns remain the same, then "history shows Covid-related restrictions in China are not likely to destroy luxury demand, only shift the timing, and that a share price pullback on this (low-multiple event) would be a particularly good buying opportunity," wrote Bank of America analysts.

The evidence at hand might indicate that this downturn isn't hitting all Americans equally. The recovery from the short-lived Covid recession was what people refer to as K-shaped. That happens when separate communities recover from economic downturns at varying rates. Some sectors of society may experience renewed growth while others continue to lag.

Growth in US fashion luxury spending grew among all income groups in 2021 as the economy recovered from Covid shocks and markets shot higher. That hasn't been the case in 2022. Luxury spending growth has been strongest amongst the higher-income cohort, up 26% year-over-year. Lower-income earners have dropped their consumption of luxury goods by 5%.

It's impossible to draw conclusions from such a small data sample, but the numbers sugget that this downturn could be a repeat of the 2020 K-shaped recession when many who worked in white-collar jobs recovered quickly as the government handed out stimulus payments and stocks and home prices appreciated. Those without savings and who worked service jobs continued to suffer, according to data from the Bureau of Labor Statistics.

Today, it appears that Walmart shoppers are getting dinged while Balenciaga shoppers are getting $800 NYSE shirts.

Republican Senators fight back against ESG push


"With great power comes great responsibility" is an adage that both Spider-Man and asset managers have taken to heart. Some Republican Senators don't like that -- at least when it comes to asset managers.

Over the past few decades investors have flocked to index-tracking funds that give them broad access to markets for accessible prices. Large asset managers, including BlackRock, Vanguard and State Street, have grown accordingly. Together the three companies manage $22 trillion in assets. That's equivalent to more than half the value of all shares for all the companies in the S&P 500.

That's a lot of money. And a lot of shares. And that means these asset managers have loads of voting power over public companies.

Lately they've been using that power to advocate for ESG-friendly changes. They've pushed companies to diversify their executive staff and boards, to focus on environmentally-friendly policies and to invest in labor.

This year, BlackRock CEO Larry Fink asked companies to set short-, medium- and long-term goals to reduce their greenhouse gas emissions. "These targets, and the quality of plans to meet them, are critical to the long-term economic interests of your shareholders," he said.

Leaders in the Alaska energy sector were unhappy with that pressure. They complained to their Republican Senator Dan Sullivan, who in turn introduced legislation that would allow voting choices to be available to individual investors in passive funds if money managers own more than 1% of a company's shares.

In other words, the investors parking money in the funds, not the fund managers, would have the voting power.

The bill is co-sponsored by 11 other Republican Senators.

"The whole ESG movement is not reflective of what America wants," said Sullivan in a recent "Squawk Box" interview. "Why should these three companies that have monopoly power be able to vote on all these shares? It's distorted the market tremendously to have these three companies that have massive, massive power. They own 88% of the S&P. That is a distortion of capital markets and it reflects on the energy policies we are talking about."

BlackRock said late last year that it would soon roll out technology to allow proxy voting by clients.

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