21st September 2015
As London Fashion Week kicked off with designers showcasing their spring/summer 2016 collections, Scilla Huang Sun, manager of the JB Luxury Brands fund at GAM, highlights the fashion brands best positioned for growth…
Despite the global market turmoil caused by the plunge in Chinese stocks, the luxury goods sector continues to flourish with very strong sales in Europe and Japan, boosted by tourist spending, as well as robust high-end US consumer demand.
We view the reaction of luxury stocks to the renminbi devaluation as overdone and do not believe that it will have a material impact on the fundamentals of the industry. China is committed to rebalancing its economy to a more consumer-driven one, but it does not intend to start a currency war.
The move to a more market-driven renminbi exchange rate is a long-term project that should eventually benefit Chinese consumers. A further, but gradual, renminbi depreciation won’t change the secular demand for Western brands.
The greatest growth potential lies in companies with stores around the globe that can capture any tourist flows influenced by currency moves. In fashion, we favour brands such as Hermès and Ferragamo.
Hermès, famous for its handbags and silk scarves, benefits from the strength of brand management and pricing power, making it well positioned for long-term growth. Italian company, Ferragamo is also attractive due to its margin potential. The group benefited from a weaker euro in the first half of this year and achieved a 15% rise in core profit. Saint Laurent (a Kering brand), Céline (LVMH), Fendi (LVMH) and Valentino are also seeing strong momentum.
Affordable brands are another key theme, benefitting from new consumers entering the luxury market. Athletic labels such as Nike and Under Armour are leading the way by developing new, innovative high-end products that appeal to a younger audience. Men’s casual wear also has a huge catch up potential as men increase their spending on luxury goods.
For the rest of 2015 we expect the positive momentum of luxury sales to continue, supported by an easier comparison base, especially in the fourth quarter. However, to stay ahead of the curve and gain market share, luxury brands need to constantly listen, innovate and adapt.
Luxury is a very emotive industry and creativity is key to captivate and draw-in consumers. Hermès and Apple working together to create an Apple Watch with signature Hermès leather strap is a great example. It’s a win-win for both companies; they are great brands in their own right but obviously very different at the same time. It’s also further confirmation of luxury going digital to adapt to changing consumer lifestyles.”