Savigny Partners Newsletter

03/01/2017

SLI Year in Review – A Bare-Knuckle Ride

Savigny Luxury Index 2016 performance

 

The SLI’s roller-coaster ride was largely driven by the unwieldy combination of political upheavals and what seemed like lofty valuations in the face of uncertain growth prospects.

Shifting Political Sands

From the passive aggressive “battle” of Brexit vs Remain on the river Thames to Trump’s downright aggressive rallies, Western democracy has morphed into a telenovela with more unexpected twists and turns than the Nürburgring.  This “unpresidented” (sorry!) level of uncertainty and drama sent shock waves through the SLI during the year.  In February, the SLI lost almost 7 percent whilst Cameron tried (and largely failed) to secure a better deal for the UK in the EU.  Having rallied in the run up to the June referendum, on the back of a predicted Remain victory, the SLI took a nose-dive after the result, losing over 7 percent as the enormity of Britain’s impending divorce proceedings sank in.  The only ones left smiling were the Bond Street stores as tourists flocked to Mayfair to snap up goodies at a 20 percent discount.  Later in the year the US elections caused jitters, notably pushing the SLI over the edge before Election Night in November.  Nevertheless, Trump’s election boosted the SLI, partly due to his promises for a more corporate-friendly environment and tax cuts for the wealthy.

Market Fears

Adding insult to injury, these political shocks rattled already nervous investors. Experts had been warning of a severe market correction since 2015, claiming, somewhat correctly, that current valuations do not reflect growth prospects across the board.  A sell-off that started in December 2015, further to a rise in the US Federal Base Rate, continued in January with a dip in oil prices adding fuel to the fire, causing the SLI to lose 9 percent in the first half of the month. A few months later in September, fears of a further interest rate increase in the US caused another market correction.  The post-2008 era of cheap money is soon coming to an end and this will have a knock-on effect on share prices, not to mention consumers’ wallets.

The Art of Re-Invention

If Madonna is the queen of comebacks, luxury is the king of re-invention. This year, the sector took digital by the horns and shook up the fashion calendar with the arrival of “see now buy now” collections.  More and more consumers have direct access to fashion shows through social media, and the luxury sector has caught up with the need to be online to access millennials.  Online sales are growing in the double digits; this is likely to continue as it becomes easier to shop directly from social media sites.  Bricks and mortar retailers (notably the troubled US department store sector) are having to rethink their strategy: a growing number of their store visitors are now preferring to shop online.

Whilst 2015 might have been the year to go high end, 2016 is turning out to be the year to go affordable.  Emerging markets, especially China, are breeding a vast middle class thirsty for entry-price products, whilst consumers in the more developed markets are being careful with their wallets.  Brands that have quickly adapted to this change in dynamics, such as Louis Vuitton and Gucci, have done very well this year.

Chinese Whispers

China has become the luxury sector’s bell-weather, with its woes in 2015 and early 2016 driving the SLI down.  The first half of this year saw Chinese tourist flows falling through the floor in the aftermath of terrorist attacks in Continental Europe and a stealth tax on personal imports of luxury goods by the Chinese government. Nevertheless, as the year went on, the Chinese government’s focus on stimulating growth through consumption, coupled with a weaker yuan and a harmonisation of prices by luxury brands of products in China vs internationally, planted the green-shoots of recovery in this strategic market.  Industry sources point to a resumption of growth in China after three consecutive years of decline.  This good news was instrumental in the SLI crossing the finishing line this year in positive territory.

Cautious Optimism for 2017

The outlook at the beginning of 2017 is rosier than a year ago: oil prices are up and key luxury markets are growing again.  LVMH has already come out with record-breaking revenues and profits for 2016, whilst other players are now talking about growth.  There are still some major issues to contend with though: Brexit Britain will have to wake up and smell the coffee when it comes to higher input prices; elections in France and Germany could threaten the stability of the EU and who knows what’s going to happen in America. Nevertheless, the key lesson from 2016 is that the luxury sector can move fast to adapt to changing dynamics.