Why Kering Is Still a More Promising Investment Than P&G

PARIS, France — It's better to own shares in LVMH or Gucci owner Kering SA than in companies such as Procter & Gamble Co. because prospects for luxury goods remain more attractive than those of consumer staples in spite of slowing Chinese demand for watches and pricey handbags, according to a portfolio manager at Amundi SA's CPR.

Brands such as Gucci “have a top-line dynamic that you don’t have in companies making deodorants or soaps, like Procter & Gamble, given their stronger pricing power,” Anne Le Borgne, thematic equities portfolio manager at CPR, said in a phone interview. Luxury goods makers will continue to be supported by demand from younger consumers, in particular in China, where the middle class is set to grow in the years to come, she said.

Investors have been dumping luxury goods stocks in recent weeks amid fears that appetite from Chinese millennials, a key engine of growth, may be ebbing amid a trade war with the US and a crackdown on imports at Chinese borders. Comagnie Financière Richemont's prediction that an 18-month period of double-digit growth in China is over deepened the sell-off on Friday.

“We’re expecting a slowdown in Chinese demand, but not a collapse of the kind you have when an external shock strongly impacts consumer confidence, which is what happened in 2015 after the terrorist attacks in Paris,” Le Borgne said.

Average top-line growth for luxury-goods companies is expected to top 7 percent in 2019 and 2020, a decline from more than 10 percent this year, but still more than double the pace of expected global economic growth in 2019, she said.

The Amundi Funds CPR Global Lifestyles has €300 million ($337 million) in assets under management and targets investments in companies benefiting from new consumer trends, be it in luxury, the technology, leisure, travel or wellness industries. LVMH, Apple Inc., Johnson & Johnson and Vail Resorts Inc. are among the fund’s top 10 holdings. Hermes International and L’Oreal SA are also part of the portfolio.

“I am quite happy with the recent correction in the luxury sector,” Le Borgne said. “Valuations are once again at interesting levels.”

Other highlights from the interview included: knowing how to adapt to new trends, such as demand from younger customers looking for more colourful, casual clothes and shoes, is “crucial” in today’s world: “Gucci succeeded in an incredible way with this.”

Digital communication and “important” investments on social media as well as in logistics are also key to brand success: “Clearly, the biggest European players are favoured because they have an advantage on this front.”

Mid-cap companies, such as Tod’s and Ferragamo, with fewer means and more dependent on a main product line, such as shoes, “are having more difficulties with online strategy.”

There are exceptions even among the smaller players: Moncler "has been very successful in innovating" with capsule collections, designer partnerships, regular new product launches and store openings.

ByAlbertina Torsoli; editors: Celeste Perri, Paul Jarvis, Jon Menon