The most important development so far in October has been the brokering of a truce of sorts in the ongoing Sino-American trade war. US and Chinese equity markets reacted favourably to the news, and while it will take several weeks to formalise the language of this ‘phase one’ deal, it hopefully provides some element of certainty to both business and consumers that trade policy will not get materially worse over the very near term. The fact that the next round of US tariffs on Chinese imports – due to come into effect on 15 October – has been taken off the table should be supportive for US consumer spending to the end of the year.
As we pointed out numerous times, we believe poor business confidence is the primary driver of the recent weakness in US economic data, and any sort of stabilisation or clarity to the trade outlook would likely do a lot to support sentiment and business investment.
However, it should also be noted that many of the more fundamental disagreements between Beijing and Washington remained unresolved, particularly with regards to intellectual property transfer, state subsidies or greater market access. While the news of a truce is certainly to be welcomed, we are not out of the woods by any stretch of the imagination, and we continue to believe it is unwise to prematurely position portfolios as if all the risks are behind us.
Against this backdrop, we await the upcoming US Q3 earnings season. US companies will start to report earnings this week, and the true test for investors will be when the market refocuses on the fundamentals of the individual stocks and not the macro-economic headlines that dominate the news in the interim.
One of my funds top five holdings – the world’s leading luxury goods manufacturer and retailer LVMH – has already released an update to the market that defied all the pessimists. For a stock that was perceived to be smack in the middle of the trade war, with expectations of substantial slowdown in luxury goods consumption, these are tremendously resilient numbers that remind you of the diversity and quality of this business.
LVMH recorded a +16% increase in group revenue , reaching E38.4 billion in the first nine months of 2019. Organic revenue grew +11% compared to the same period of 2018. This is important for a company with a gross profit margin of 66%.
In the third quarter alone, revenue was +17% compared to the same period in 2018. Organic revenue growth was +11%, a performance in line with the trend recorded in the first half of the year. The United States and Europe saw good progress in the third quarter, as did Asia, despite the difficult context in Hong Kong.
If we look at a breakdown of the key revenue segments you can see the portfolio is in very solid shape, albeit growing at different rates. The following is direct results commentary from LVMH.
The fundamental sales data reported by LVMH suggests a substantially less reticent global high-end consumer to the one newspaper/Twitter headlines would have you believe in. This is doubly true when considering that LVMH saw substantial disruptions to their sales in Hong Kong, which represents roughly 6% of total group sales. The key Fashion & Leather Goods numbers are even more outstanding in this context.
Through a combination of strategic planning and global diversification, LVMH has managed to navigate the current climate smartly – an outcome that reflects well on management. The latter point is important – backing competent and ethical management teams spares an investor many headaches, as they actively work to ensure the business can flourish in good times and endure during tough ones. Mr. Bernard Arnault (CEO) and the management team of LVMH have proven extremely capable of custodians of the business for the long-term benefit of investors, and we believe they can continue to do so for many years to come. In fact, they are exactly the type of leadership team we like to back, as they think about building a business that can survive for generations.
LVMH shares traded back up to all-time highs after the confirmation of continued strong sales/revenue growth. This again reminds you that you have to do your best to ignore short-term noise and remain invested in the very best businesses in the world.
If anything, recent earnings evidence from Nike, Estee Lauder and LVMH suggests that the world’s strongest consumer brands are actually taking market share and getting stronger/more profitable.
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