02 Aug 2024
With visitors heading to Paris for this summer’s Olympics, which French companies stand to benefit? Marcel Stötzel, portfolio manager of the Fidelity European Fund and Fidelity European Trust PLC, examines the changing dynamics of the luxury goods market. He highlights why he continues to favour companies with strong pricing power, which will be well-placed to grow in an uncertain market environment.
Key points
When it comes to French luxury, many look to the country’s powerhouses - LVMH, Hermes and Cartier. But contrary to what you might expect, the overall effect of the Olympics on France’s luxury goods market could be neutral or even negative. Some gains may accrue from increased customer loyalty and long-term goodwill, on the part of those treated to the lavish hospitality and events, although this is hard to quantify.
Air France recently issued a profit warning, citing reduced numbers of flyers into Paris during the summer. In terms of visitors, there may well be a crowding out effect, whereby the headline number of ‘Olympic visitors’ doesn’t reflect the net number, or those who choose not to travel to Paris. Moreover, the target audience for the Olympics skews lower down the income distribution in comparison with higher end consumers who would be expected to spend the most on luxury products. They will likely skip the traffic and the crowds all together, and potentially spend instead on holidays in other countries. On top of this, given increased hotel prices and flight costs, those who do travel have less scope for goods shopping - particularly high-end goods.
Changing preferences of the Chinese luxury shopper
Where Chinese tourists were pre-Covid a significant factor in luxury goods demand in European countries they visited, this has now changed. While the numbers of Chinese holidaying abroad have risen significantly since the end of Covid restrictions, many are now choosing Japan given the proximity and extreme weakness of the yen. Organised Chinese tour groups also tend to visit Europe for more than one destination; if a key one like Paris is deemed less attractive, then the whole trip may be off. In addition, the 80/20 shift that used to exist between external luxury purchases and domestic ones has now swapped, such that 80% of Chinese luxury purchases are now domestic. Any significant gains for French luxury houses from Chinese buyers at the Olympics are unlikely.
Add to this weaker than normal French domestic demand - with consumers staying away from Paris due to traffic, travel restrictions, crowds and higher than normal prices for experiences and accommodation, and overall you do not have a great set up for French luxury businesses. Events and sponsorship may have some longer-term intangible benefits. LVMH is one of the premium sponsors and is hosting a variety of events and exhibitions in the run up to and during the games.
Italian luxury names could be relative beneficiaries from these dynamics, with more travellers heading to Italy instead of France. Italy also recently lowered its tax-free shopping threshold to encourage tourist spending. We do not, however, hold any of these Italian names in our strategy, given other fundamental considerations to do with these businesses.
Pricing power remains key
The luxury sector has had a tough time of it over the last 18 months. Aspirational consumer demand globally remains weak, although the wealthiest consumer segment remains resilient. The US remains weaker than expected, given the hoped for ‘wealth effect’ from stock market gains. Companies now sound more pessimistic about a hoped-for inflection in US demand from H2. Recovery in China has been slower than expected. On a longer-term basis, however, we continue to like the companies we hold in this segment. We have used the recent weakness in stock prices to add to some of these names at attractive prices.
Over the last two years, we have been working hard to identify pricing power winners; or those firms which can mitigate the effects of inflationary pressures through increased pricing. Products with inelastic demand - like luxury goods - are a good example of this. Some may even be ‘Veblen goods’ where demand increases as price increases. Though inflationary pressures in Europe and elsewhere are now falling, this is still an important criterion for us when selecting stocks. This pricing power protects dividend growth in times of inflation. And sustainable dividend growth is the holy grail of our approach - leading to hopefully outperformance versus regional indices over time.
Important information
Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of an investment in overseas markets. The Fidelity European Fund and Fidelity European Trust PLC can use financial derivative instruments for investment purposes, which may expose them to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The shares in the investment trust are listed on the London Stock Exchange and their price is affected by supply and demand. The investment trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. Changes in currency exchange rates may affect the value of an investment in overseas markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only.