Market Pulse
Friday, October 4, 2024
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:
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.
Late last week, French luxury fashion giant LVMH announced an investment in Moncler, an Italian maker of jackets and outerwear. The deal, which amounts to a 1.6% stake with an option for further investment, fueled speculation that LVMH is building a foothold for an acquisition. In a statement, LVMH CEO Bernard Arnault downplayed acquisition talks, noting that the investment will help “support the independence of the Moncler Group.”
LVMH’s decision to invest in Moncler is a surprising one. In recent years, LVMH’s acquisition strategy has focused on using the company’s luxury expertise to facilitate turnarounds in down-and-out brands. This playbook can be seen in LVMH’s 2021 purchase of Tiffany as well as their 2011 acquisition of Bulgari.
In contrast, Moncler is widely regarded as a well-run company with strong growth in recent years. While LVMH may be able to facilitate brand collaborations and use its size to supercharge Moncler, an acquisition of the company would stray from LVMH’s tried-and-true playbook. And if a full acquisition isn’t in the cards, LVMH’s purpose for investing in Moncler is not entirely clear.
This is especially true when there are more viable acquisition targets on the market for LVMH to pursue. Burberry, for instance, is a prime example of a brand with a strong heritage that is currently struggling. Amid falling sales and poor strategy decisions, Burberry shares have declined about 50% this year, with the company even falling out of the FTSE 100. In other words, it badly needs the expertise in brand turnaround that LVMH is so well known for.
Furthermore, Moncler currently has an enterprise-to-sales multiple of 5.0x. In comparison, Burberry trades at under 1.2x. As investors, the question is not necessarily whether LVMH’s stake in Moncler will end up adding value to both companies, but whether the cash used to build this stake could have been better spent elsewhere.
Arnault’s stewardship of LVMH has been exceptional so far, especially considering the wider context of a generally battered luxury market. Still, the decision to invest in Moncler is a surprising one, and we look forward to learning more details on how the deal will play into LVMH’s future strategy.
Note: We currently hold LVMH in our Flagship portfolio
Judging from a string of profit warnings over the past week, the auto industry does not appear to be firing on all cylinders. Volkswagen, Europe’s biggest automaker, recently issued its second profit warning in just three months, joining Mercedes-Benz Group and BMW in cutting expectations. Shortly thereafter, both Stellantis (whose brands include Jeep and Chrysler) and Aston Martin (a luxury British carmaker) joined the chorus, warning investors about falling sales.
The auto industry’s current struggles are rooted in three separate but closely related trends. The first is China’s slowing economy, where consumer spending has fallen by more than anticipated. Thanks to a growth strategy focused on selling cars to China’s burgeoning middle class, many European carmakers are highly reliant on the country. Around 30% of Volkswagen’s revenues, for instance, come from China.
To make matters worse, just as Chinese consumers have stopped spending so much on cars, Chinese auto manufacturers have become increasingly competitive with Western companies. While Chinese cars were once seen as mere ‘knock-offs,’ companies like BYD are now a serious competitive threat, gaining market share both domestically and internationally.
Finally, many traditional carmakers have been caught off-guard by the rapid pace of consumer adoption of electric vehicles. EVs as a percentage of new car sales globally stood at 18% in 2023, up from almost nothing a decade ago. The most indicative example here is Tesla, which has seized market share from traditional competitors. BYD, however, is now neck-and-neck with Tesla for the title of biggest EV seller, thanks to rising EV market share in China.
While China’s current economic struggles are a cyclical struggle, the market shift to EVs is a secular one that traditional carmakers appear unprepared for. In fact, as electrification takes hold, the actual ‘vehicle’ component of automotives is becoming increasingly commoditized, with most differentiation being expressed through technology and software.
Reflecting this view, our Flagship portfolio keeps a low exposure to the traditional auto sector as a whole. We do hold small positions in Tesla and Ferrari owing to their technological advantages and luxury characteristics, respectively. In the future, as self-driving and assisted driving tech improves, we expect these types of advantages to be the biggest determinant in which companies ultimately come to dominate the auto space.
Early on Tuesday, US dockworkers along the country’s East and Gulf Coast went on strike after wage negotiations with an employer group broke down. The strike was the first port shutdown in the US in nearly 50 years and affected ports that handle nearly half of the country’s imported goods.
Initial estimates of the economic impact of the strike varied widely. While economists at Oxford Economics anticipated a cost to the US economy of almost $5 billion per week, JPMorgan analysts expected a much more significant hit of nearly $5 billion per day. Ultimately, though, the strike concluded far sooner than many expected, minimising the extent of the damage.
Late on Thursday, dockworkers agreed to return to work under the terms of their original contract until January of next year. Until then, the two sides will continue negotiating a deal that could involve higher pay and restrictions on automation. The stopgap agreement is also a win for the Biden administration, which managed to avoid invoking a federal law that would have forced dockworkers back to the job.
For policymakers, the coming months represent a crucial opportunity to ensure that the two sides come to an enduring deal. If negotiations remain stalled between dockworkers and their employers, the strike could reignite in the new year, potentially leading to more significant fallout.
The episode also highlights the continuing fragility of global supply chains. A resurgence in supply-chain-induced inflation (much like the world saw in the aftermath of the Covid pandemic) could force the Fed to delay rate cuts. While disaster appears to have been averted for now, the story is far from over.
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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