Optimistic Outlook for 2017
North-American firm RBC has published an interesting report with its forecasts for the 2017 luxury sector.
Perhaps the most important part is that they have a positive vision for the next year, contrary to what they have been holding since the beginning of 2015. This optimism is produced by the improvement of the sales trends since July 2016, especially in China and the United States.
For the analysts of this firm, the organic growth of the industry will stand at 5%, with a clear improvement from 2% in 2016 and 4% in the two previous years (2014 and 2015). However, these figures are still modest compared to the strong increases we saw in the years following the financial crisis (with double-digit growth rates). On the downside, RBC notes that the sector’s current valuation level (2017 P/E at 20x) is relatively high for these expectations.
For RBC, the year will be marked by the degree of real improvement in Hong Kong and France, if these markets really bottomed in 2016. Also important will be the geopolitical risk and the evolution of the most important currencies for the sector (Euro and Dollar on the one hand and the Chinese yuan on the other), especially in the face of a possible change in the pattern of consumption by Chinese buyers. For RBC, the three big surprises that could occur in 2017 would be the impact in the US of a stronger dollar and the possible tax cut, the trend change of luxury watches after a very tough 2016 and the trend change of groups which have behaved worse this year in relation to the industry as a whole.
Recommendations.
Within this positive scenario for 2017, RBC highlights its preferred values: LVMH, Richemont, Moncler and Jimmy Choo. LVMH is gaining market share in many of the countries and markets where it is present, offering above-average growth and a lower risk profile than the vast majority of its competitors thanks to its diversification. It also quotes at relatively reasonable ratios taking into account all these advantages. Moncler and Jimmy Choo offer untapped store roll-out potential and relatively resilient retail performance. Richemont has an attractive exposure to jewelry, a margin of long-term potential and the industry’s strongest balance. Other companies that expect to perform better than the average are Swatch Group and Pandora.
On the negative side, the company recommends underweight companies that are under great pressure on sales and with execution risks, such as Tod’s Group, Ferragamo and Prada. Finally, companies that will be sector-perform would be those that appear to be correctly valued on the basis of their long-term results forecasts, such as Hermes, Adidas and Kering, or those that do not have result-momentum catalysts in the short-term such as Burberry or Luxottica.
Disclosure: The Luxonomist is not responsible for the views expressed in the article. The text has been written freely expressing their own ideas, without receiving any compensation. The author has no business relationship with any of the companies whose shares are listed in this article.
