Falling Chinese consumer confidence is keeping Sanlam Investments’ Hannah Gooch-Peters from buying luxury stocks like LVMH.
Speaking to CNBC’s Silvia Amaro, the portfolio manager said she would need a “larger margin of safety” before investing in the world’s largest luxury group.
“A lot of these European companies were really driving their growth from Chinese consumers, so when we started seeing missteps in execution … it was almost a perfect storm for L’Oreal and LVMH,” Gooch-Peters said, as the companies traded at “extremely high valuations for the growth they had to offer.”
Shares of L’Oreal and LVMH have fallen about 20% and 10% respectively in the past 6 months, as fears about the strength of Chinese consumers have weighed on the sector. Peers including Estee Lauder – which Gooch-Peters said also made mistakes in China – and Gucci-owner Kering have also fallen significantly during this period.
LVMH’s fourth-quarter sales fell 3% year-on-year as revenue in Asia, excluding Japan, fell 16%. The group’s CFO said at the time that Chinese consumer confidence was at an all-time low in the Covid era.
“What we want to see is just a little bit more confidence in the improvement with Chinese consumers,” Gooch-Peters said. “We would need a greater margin of safety to be able to engage in that part of the market, before we go there.”
The best choice
However, one stock that the portfolio manager loves is CME groupone of the world’s largest derivatives markets.
Sanlam Investments bought shares in the company in June last year, given its “very, very good operating margins” and “fantastic balance sheet”, Gooch Peters said.
She added that she also likes the US company’s “cash flow”. [that] is very, very sustainable, very predictable,” adding that investors “don’t have to worry” about debt servicing costs.
CME Group achieved record revenues in October and at the beginning of the year CEO Terry Duffy said he was confident his company was in a better position but its rival, FMX.
Billionaire Cantor Fitzgerald CEO Howard Lutnick — The newly elected US President Donald Trump has been chosen as the Secretary of Commerce — launched FMX in September under its brokerage BGC Group.
Despite the launch, Gootch-Peters believes the barriers to entry in the sector remain “extremely high”.
“What sets CME apart from its competitors is that it is primarily transaction-based, and is a leader in interest rate and futures derivatives, and they have the largest pool of liquidity in the world in US Treasury futures, which is actually why it has such high barrier to entry,” she said.
