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Five Things to Watch in European Luxury-Goods Stocks in 2020

Five Things to Watch in European Luxury-Goods Stocks in 2020

(Bloomberg) -- For the owners of red-hot luxury brands such as LVMH’s Louis Vuitton and Kering SA’s Gucci, 2019 turned out to be a spectacular year in the stock market, confounding the dire predictions from some analysts. It may be hard to replicate that feat in 2020.

Kering and Hermes International have each surged 37% this year, while juggernaut LVMH has jumped 56%, adding 73.7 billion euros ($82 billion) to its market value. Handbags, dresses and bottles of Champagne flew off the shelves even as social unrest in Hong Kong, protests in France and a U.S.-China trade war dented consumer demand.

Five Things to Watch in European Luxury-Goods Stocks in 2020

The end of the year saw easing trade tensions and signs of more solid economic growth, but with a lot of good news already reflected in the luxury giants’ share prices, it remains to be seen how much further they can rally.

Below are five things investors in luxury stocks should look out for in 2020:

China Slowdown?

While analysts predicted a drop in demand from affluent Chinese clients for 2019, some are saying that slowdown could really take place in 2020. China’s economy grew in the third quarter at the slowest rate in decades, and forecasters see it slowing further next year.

For now, though, mainland China, where spending is beating all expectations, and Europe, thanks to its weaker currency, look like “shopping hot spots” in 2020, says Deborah Aitken of Bloomberg Intelligence.

The trend in mainland China also is enabling the companies with the strongest Asian networks, such as LVMH, Kering and Moncler SpA, to widen their lead over “out-of-favor” U.S. prestige brands like Tapestry Inc.’s Coach and Capri Holding Ltd.’s Michael Kors, Aitken said.

Takeover Targets

After LVMH’s $16.2 billion deal for Tiffany & Co. and talks between Kering and Moncler, more mergers and acquisitions are sure to follow. Switzerland’s Richemont, a laggard among the luxury conglomerates, remains the ideal target for companies such as Kering, says Sanford C. Bernstein’s Luca Solca.

Speaking of laggards, attention may finally turn to smaller companies that have struggled to boost sales, such as Salvatore Ferragamo SpA and Tod’s SpA. Other potential Italian targets include Prada SpA and Brunello Cucinelli SpA, as well as closely held companies Giorgio Armani SpA, Valentino SpA, Missoni SpA and Sergio Rossi SpA. One wild card: Closely held Chanel could tie up with Richemont, or sell shares in an initial public offering, Solca said.

Social Unrest

Hong Kong upheaval will continue affecting luxury-goods companies from Swatch Group AG to Prada. An end to the protests in the former British colony would bolster sentiment on watchmakers, among the most hit by the disruption, says Morningstar Inc. analyst Jelena Sokolova. For now, there are no signs of an end.

And it’s not only Hong Kong. France’s yellow vest protests are over, but now the epicenter of the luxury industry is being hit by a prolonged strike, and there’s been social unrest in parts of Latin America and the Middle East.

Turnaround Stories

There are plenty of “under-managed” companies that are likely to be in the spotlight in 2020, said Bernstein’s Solca. Swatch, which refuses to cut production and didn’t anticipate the “massive” competition from smartwatches, is one example, he says, as is Richemont, stuck with a slower-than-expected integration of e-commerce platform Yoox Net-a-Porter. Representatives of Swatch and Richemont declined to comment.

Meanwhile, other brands are seen as making progress on their turnaround. Burberry Group Plc, which is being reinvigorated by star designer Riccardo Tisci, and Kering’s Bottega Veneta are showing “encouraging signs” and are the brands to keep an eye out for in 2020, said Morningstar’s Sokolova.

Sustainability Divide

Sustainability is becoming an ever-more-important theme for clients splashing out on pricey handbags and designer clothes, says Anne Le Borgne, who runs luxury-stock funds for Amundi SA’s CPR Asset Management.

“Customers want to know what product they’re buying, where it comes from and what materials it’s made of,” she says. “Investors also are on the hunt for investments that don’t hurt the planet. It wasn’t a topic, really, a year ago.”

Growing at twice the pace of global luxury goods, the second-hand market could reach $27 billion in 2020, says BI’s Aitken, damping demand for new products. The sustainability push means investments that hadn’t been previously earmarked, further widening the gap between luxury leaders and laggards, says Le Borgne, and could lead to further M&A, as companies that don’t get it right end up gobbled up by rivals.

--With assistance from Chiara Remondini and Corinne Gretler.

To contact the reporter on this story: Albertina Torsoli in Geneva at atorsoli@bloomberg.net

To contact the editors responsible for this story: Beth Mellor at bmellor@bloomberg.net, Phil Serafino

©2019 Bloomberg L.P.