Market Pulse | Luxury slowdown, scarred consumers, and… pricing in politics

Welcome to this week’s Market Pulse, your 5-minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team.

Our three stories this week:

Luxury Slowdown
Scarred Consumers
Pricing In Politics

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It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.

1) Luxury Slowdown

To say that the luxury sector had a challenging start to 2024 would be an understatement.

Just last week, De Beers lowered its diamond prices by about 10% [1], the number of champagne bottles shipped in France hit its lowest point since 1985 [2], and both Burberry [3] and Hugo Boss [4] issued profit warnings, causing their stock prices to drop by double digits.

The sector's downturn was somewhat anticipated after a post-pandemic era of above-average growth. Challenges are well known, such as central banks raising interest rates to address inflation and increasing geopolitical tensions. The upcoming US presidential election will also contribute to a more restrained macroeconomic environment in 2024.

But backdrops like this present opportunities in a sector with impeccable long-term prospects. The S&P Global Luxury Index is down -2% from a year ago [5] (vs MSCI World +18%), with sector valuations hovering around multi-year lows. As we wrote in a previous Market Pulse, the sector is more heterogeneous than many believe [6]. The success of luxury brands hinges on skillfully blending tradition and innovation to remain appealing to a constantly evolving consumer base.

In a market where demand is slowing down, brands like Burberry or Gucci are currently facing short-term challenges as they work on repositioning their products. However, the potential gains could be substantial if they succeed. At the same time, industry giants like Louis Vuitton are using their significant size to strengthen their competitive advantage even more.

No matter what end of the spectrum one chooses to play in, 2024 is set to be an important year for the sector. With valuations low and momentum negative, January may seem early to think about 2025. Yet, a good rule of thumb is to look ahead for 12 to 18 months. If investors do that, they'll probably see a brighter picture of the luxury sector.

2) Scarred Consumers

People's encounters with big economic events can have a lasting impact on their attitude towards risk. For instance, those who lived through the Great Depression as kids continued to be influenced by it throughout their lives [7]. This effect extends beyond extreme events, like the Great Depression, to include periods of high inflation, such as in the 1970s [8].

A recent study by the authors of the famous "Depression Babies" paper [7] argues that consumers who have lived through times of unemployment exhibit persistent pessimism about their future financial situation. They spend significantly less years later, controlling for income, employment, and other life-cycle consumption factors.

The study focuses on the aftermath of the 2008/2009 financial crisis. People who lived through this recession in the US were found to have lower consumption several years later, in 2013. For instance, people living in Pennsylvania, where unemployment rates increased less than in Florida, reduced their consumption by a smaller margin. On the contrary, individuals in Florida with a lifetime experience of higher unemployment rates cut their consumption more than those with a more favourable labour market experience:

While the current unemployment rates are much lower than the peak of the 2009 financial crisis (3.7% now compared to 10% back then [9]), they are on the rise. Coupled with a general increase in the cost of living, this might shape how consumers behave in the years ahead. Whether these factors will be sufficient to counterbalance the positive impact of a decade marked by relaxed monetary policies remains to be seen.

3) Pricing in Politics

In 2024, a significant global milestone will be reached for the first time: over half of the world's population resides in countries set to conduct nationwide elections [10]. Drawing from recent voting trends, it is anticipated that nearly 2 billion individuals across more than 70 countries will participate in the democratic process by heading to the polls.

The democracy milestone deserves celebration, yet its market impact this year may outweigh economic cycles, fundamentals, or even Federal Reserve actions. This highlights the challenge of predicting how political events influence asset prices.

Consider the case of Baidu, often deemed the Chinese equivalent of Google, which is having a challenging time this week. The stock dropped -15% following a report on Friday alleging that the Chinese military employed its artificial intelligence bot, Ernie—a service akin to Bard and chatGPT [11]. Despite the company's formal statement refuting these claims, investor concerns persisted, primarily driven by potential trade reprisals rooted in U.S. national security anxieties.

The short-term reaction reflects the long-term performance differential between Baidu and its natural peer: Google’s parent Alphabet. Both are dominant search engines, well-placed in artificial intelligence. Yet, despite delivering significantly higher growth over the past decade, Baidu’s performance has lacked not only Alphabet’s but also the NYSE Fang+ Index - a group of high-growth peers of which it was a member until not long ago:

Baidu has thrived in China's growing economy, but recent performance disparities are driven more by investor sentiment than fundamentals. Concerns about geopolitical risks, particularly any connection with the Chinese military, have significantly discounted Baidu's value.

Despite the undervaluation of high-quality Chinese assets, prudent investors might prefer to wait for a positive shift in US-Chinese relations before considering potential opportunities.

Notices

As of writing, Alphabet and LVMH are holdings in Sidekick's Flagship strategy.

Please remember, investing should be viewed as longer term. Your capital is at risk — the value of investments can go up and down, and you may get back less than you put in.

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