Fund manager reveals what needs to change for her to invest in luxury stocks

A fall in Chinese consumer confidence is preventing Hannah Gooch-Peters of Sanlam Investments from buying luxury stocks such as LVMH.

Speaking to CNBC’s Silvia Amaro, the portfolio manager said he would need a “larger margin of safety” before investing in the world’s largest luxury group.

“Many of these European companies were really deriving their growth from the Chinese consumer and so when we started to see the missteps in execution … it was almost the perfect storm for L’Oréal and LVMH,” Gooch-Peters said, as the companies traded at “exceptional valuations for the growth they had to offer.”

Shares of L’Oreal and LVMH are down about 20% and 10% respectively in the past 6 months, as fears about the strength of the Chinese consumer weigh on the sector. Peers included Estee Lauder — which Gooch-Peters said also made mistakes in China — and the owner of Gucci dry they also dropped significantly over the period.

Fourth-quarter sales at LVMH fell 3% versus the same period a year earlier, as revenue in Asia, excluding Japan, fell 16%. The group’s CFO said at the time that Chinese consumer confidence was at a Covid-era low.

“What we want to see is just a little bit more confidence in the improvement of the Chinese consumer,” Gooch-Peters said. “We need a greater margin of safety for us to be able to be involved in that part of the market, before we go there.”

The first choice

One stock that the portfolio manager likes, however, is CME Groupone of the largest derivatives markets in the world.

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.

He added that he also likes the “cash flow stream of the US-based company [that] it’s very, very sustainable, very predictable,” adding that investors “don’t have to worry” about the cost of servicing the debt.

The CME Group made a record 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.

Howard Lutnick, billionaire CEO of Cantor Fitzgerald – President-elect of the United States Donald Trump has chosen for secretary of commerce – launched FMX in September under its brokerage BGC Group.

Despite the launch, Gootch-Peters believes the barriers to entry in the sector remain “extremely high”.

“The thing that distinguishes CME from its competitors is that it is mainly based on transactions, and is the leader in interest rates and futures derivatives, and they have the largest liquidity pool in the world in the futures of the US Treasury, which is really why it has such high barriers to entry,” he said.