Market Pulse | Strong results fuel sector growth before tailspin in early August

Savigny Luxury Index July 2011 | Source: Savigny Partners

LONDON, United Kingdom Over the past few days, international markets have plummeted in the face of growing uncertainty about the global economy, in particular the debt crisis in Europe and the downgrade of US treasuries by Standard & Poors. In this month’s Market Pulse, we analyse the market’s strong performance in July and provide a market update from the first few days of August.

Big news

• H1 results beat expectations across the board, prompting companies to upgrade their estimates for 2011.  In particular LVMH and Hermès both posted EBIT increases in excess of 20 percent, driven principally by growth in China and the USA.  Hermès upgraded its sales forecasts for 2011 to +12-14 percent, the only cloud on the horizon being its low inventory levels.

• PPR and LVMH step up their investment in the watch sector, respectively with an increase in shareholding to 50.1 percent in Sowind (Girard-Perregaux, JeanRichard) and the acquisition of La Fabrique du Temps, a specialist watchmaking workshop.

Going up

• Prada and Ferragamo stocks fared well, rising 7 percent and 28 percent respectively during the month of July, resulting in a very impressive increase of 24 percent and 48 percent respectively over their IPO prices.

• Hermès’ share price continues its near vertical ascent, gaining almost 20 percent in the month.

Going down

• Safilo is the SLI’s worst performer as its share price continues to lose ground based on company’s recent underperformance.

• Ports’ share price has been sliding down this month, owing to fears over an increase in tax rate for the current fiscal year.

• Swiss watch groups Richemont and Swatch take a hit mid-month as the Swiss Franc continues to climb and threaten exports.  Both stocks recovered some of their lost ground with Swatch ending flat on the month but Richemont’s share price still declining by 7.7 percent.

What to watch

• Continued uncertainties over currencies, with the Swiss Franc going in opposite direction to the US Dollar and the Euro.

Sector Valuation

Current Market Update:  Turmoil sends SLI in downward spiral

• Global markets have been sent in a tailspin in the first week of August, as concerns mount over a spreading debt crisis in the Eurozone and the USA loses its AAA rating.  The SLI drops 10.2 percent; this compares with a 7.7 percent decrease in the MSCI.

• Not for the first time, the SLI shows greater volatility than the overall market index in terms of crisis, with investors seemingly penalising the sector.  Yet the luxury industry continues to harbour better long term prospects than most other sectors.  Could this be an over-reaction by the market?

Savigny Luxury Index August 2011 | Source: Savigny Partners

Pierre Mallevays is a contributing editor at The Business of Fashion and founder and managing partner of Savigny Partners, a corporate advisory firm focusing on the retail and luxury goods industry