A slump in Chinese consumer confidence is holding Sanlam investments’ Hannah Gooch-Peters back 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 deriving their growth from the Chinese consumer and so when we started to see missteps in execution … it was almost the perfect storm for L’Oreal and LVMH,” Gooch-Peters said, as the companies were trading at “exceptionally high valuations for the growth they had to offer.”
L’Oreal and LVMH shares are down around 20% and 10% respectively over the last 6 months, as fears over the strength of the Chinese consumer weighed on the sector. Peers including Estee Lauder — which Gooch-Peters said had also made mistakes in China — and Gucci-owner Kering have fallen significantly over the period, too.
Fourth-quarter sales at LVMH fell 3% versus the same period a year before, as revenue in Asia, excluding Japan, slid 16%. The group’s CFO said at the time that Chinese consumer confidence was at Covid-era lows.
“What we want to see is just some more confidence in the improvement in the Chinese consumer,” said Gooch-Peters. “We would need a larger margin of safety for us to be able to get involved in that part of the market, before we go there.”
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One stock the portfolio manager does like, however, is CME Group, one of the world’s largest derivates marketplace.
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 U.S.-based company’s “cash flow stream [that] is very, very sustainable, very predictable,” adding that investors “don’t have to worry” about the cost of servicing debt.
CME Group post record revenues in October and earlier in the year CEO Terry Duffy said he was confident his company was in a better position than its rival, FMX.
Billionaire Cantor Fitzgerald CEO Howard Lutnick — U.S. President-elect Donald Trump’s pick for commerce secretary — launched FMX in September under his brokerage BGC Group.
Despite the launch, Gootch-Peters believes barriers to entry in the sector remain “extremely high.”
“The thing that sets CME aside from its competitors is it’s primarily transaction based, and it’s the leader in interest rates and futures derivatives, and they have the biggest liquidity pool in the world in U.S. Treasury futures, which is really why it has such high barriers to entry,” she said.
