Investors in luxury goods have to be careful

Faint-hearted investors may need to be careful with luxury-goods makers this year, as nationalist movements on both sides of the Atlantic push for protectionism.
In Europe, in the event populism leads to breaking up the single currency, the safest bets would be buying high-quality luxury stocks -- such as Hermes International, the maker of Birkin handbags, as well as LVMH Moet Hennessy Louis Vuitton SE, Luxottica Group SpA and Richemont, Exane analysts led by Luca Solca wrote in a note. They have relatively low debt, and the Italian and French brands would benefit from currency weakness, as they typically sell in dollars.
“This scenario would be likely to cause asset market dislocation but should create a major buying opportunity for luxury-goods stocks, likely to emerge unscathed in the aftermath,” Solca said.
Another possible “dark cloud” Exane sees on the horizon is a spat between the U.S. and the eurozone leading to stiffer import duties and tariffs on European products. In this scenario, companies most exposed to demand from the U.S. would suffer the most. About 80 percent of the European companies’
sales are outside of Europe.
Luxottica may be one of the worst affected, with Brunello Cucinelli SpA and Salvatore Ferragamo SpA also suffering. LVMH could in part offset the blow through local U.S. manufacturing and Tod’s SpA could escape relatively undamaged due to limited U.S. exposure. At Burberry Group Plc, which surged Tuesday after Belgian investor Albert Frere reported buying a 3 percent stake, most of the production is done in Europe.
But in the case of a fallout between President Donald Trump’s administration in the U.S. and China, the advice is more
drastic: sell the sector before this happens and get back to it “as the dust settles.” Alternatively, investors should focus on companies with lower numbers of Chinese customers, like Cucinelli.
This is by far the most negative scenario for luxury goods, Exane analysts say, with anything that damages Chinese consumption likely to weigh heavily on global demand after the recent boost to the sector from greater Chinese spending.

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