Falling Chinese consumer confidence is keeping Sanlam Investments' Hannah Gooch-Peters from buying luxury stocks such as LVMH.
In an interview with CNBC's Silvia Amaro, the portfolio manager said she would need a “larger margin of safety” before investing in the world's largest luxury group.
“A lot of these European companies are really getting their growth from the Chinese consumer, so when we started to see execution errors… L'Oreal and LVMH,” Gooch-Peters said, while the companies were trading at “exceptionally high valuations relative to the growth they had to offer.”
Shares of L'Oreal and LVMH have fallen about 20% and 10%, respectively, over the past six months as concerns about the strength of the Chinese consumer weighed on the sector. Peers, incl Estée Lauder — which Gooch-Peters also said made mistakes in China — and the owner of Gucci Dry also decreased significantly during this period.
LVMH's fourth-quarter sales fell 3% from the same period a year earlier, while revenue in Asia, excluding Japan, fell 16%. The group's chief financial officer said at the time that Chinese consumer confidence was at a Covid-19 low.
“We just want to increase confidence in the recovery among Chinese consumers,” Gooch-Peters said. “We would need a greater margin of safety so that we can engage in that part of the market before we go there.”
The best choice
However, one stock that the portfolio manager likes is stocks CME Groupone of the world's largest derivatives markets.
Sanlam Investments bought shares of the company in June last year given its “very, very good operating margins” and “fantastic balance sheet,” Gooch Peters said.
She added that she also likes that the U.S. company's “cash stream (which) is very, very sustainable and predictable,” adding that investors “don't have to worry” about debt service costs.
CME Group reported record revenues in October and at the beginning of the year CEO Terry Duffy expressed confidence that his company is in a better position than its rival, FMX.
Billionaire Cantor Fitzgerald CEO Howard Lutnick – The election of US President-elect Donald Trump as Secretary of Commerce — launched FMX in September as part of its broker BGC Group.
Gootch-Peters believes that despite the launch, barriers to entry remain “extremely high”.
“What sets CME apart from its competitors is that it is primarily transaction-based, is a leader in interest rates and futures derivatives, and has the world's largest pool of liquidity in U.S. Treasury futures and that's why it has such a high barrier to entry,” she said.