Details at Gucci RTW Spring 2019

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 Anne-Laure 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 under-penetrated 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.