Luxury continues to attract investors

Several stock markets have (again) beaten their all-time highs. And this is not unusual in recent times. This confirms that the financial fundamentals are positive and that the trend is strengthening.

81% of US companies reported better-than-expected earnings in the third quarter of 2021, while 75% reported revenues above expectations. Profits were on average 10% higher than analysts' estimates. S&P 500 margins reached an all-time high of 13.1%. The growth in European equity earnings is also expected to reach 60% in 2021 at a level 15% higher than 2019.

The luxury sector is no exception in this favourable macro-financial environment. The global market is expected to grow by 29% in 2021 reaching 297 billion Swiss francs, a level slightly higher than 2019. The US market, which accounts for a third of global sales, has taken over from Chinese demand, which is normalising but still remains 20% below the 2019 level. The latter should accelerate next year until 2025 to reach almost 40% of the market. The outlook for the fourth quarter of 2021 remains just as positive due to fewer health restrictions in Asia, stronger local demand and the gradual recovery of international mobility. Sales growth could thus reach the 10% mark for the year as a whole.

In Switzerland, Richemont reported profits 30% above expectations with a margin of 21.9%. Sales rose by 26% over two years, particularly in the jewelry business. Sales in Europe are recovering (4% below end-2019 levels) and remain at high levels in the US (+59%) and Asia Pacific (+43%). The latter represents 42% of group sales. The net result thus exceeds expectations by 10%. Swatch also benefited from the strong growth in Swiss watch exports, up by 4.8% over two years and by 12.5% over one year. This momentum was mainly sustained by watches with prices above 3,000 dollars, which rose by 14% over two years.

For the sector as a whole, the outlook for 2022 remains positive, but growth is set to slow down. Growth rates are set to normalise in view of their high levels, particularly in the United States (up 50% over two years) and in China. For the latter, the ongoing economic slowdown and recent political and societal developments are creating uncertainty which makes the scenario of a normalisation of the decline in growth rates more likely. Spending on luxury goods should therefore continue to grow by 8% in 2022, while maintaining its appeal to investors.

Arthur Jurus is a senior strategist at ODDO BHF Group