Hermès captured the lion’s share of growth in luxury-goods spending in the second quarter, while everyone else lagged behind
3 min
Louis Vuitton’s owner designed the medals for the Paris Olympic Games. It can’t be easy to see rival Hermès make off with gold in the second-quarter sales heat.
France’s three most powerful luxury-goods companies reported very mixed second-quarter results last week. On Tuesday, LVMH Moët Hennessy Louis Vuitton said sales in the three months through June rose by a disappointing 1% compared with the same period last year. Gucci owner Kering followed with an 11% fall for the quarter and issued a profit warning. Hermès left its competitors in the dust with a 13% increase in sales over the same period.
Hermès captured more than 100% of the incremental growth in the industry in the latest quarter. Luxury shoppers spent €440 million—equivalent to $477.6 million at current exchange rates—more in the French brand’s stores than they did in the same period of last year. They spent €400 million less on all other luxury brands combined, based on analysis by Bank of America .
This points to a double whammy for high-end brands, which face challenges at both ends of the consumer spectrum they serve.
It has been clear for months that middle-class shoppers in the U.S. and China, the luxury industry’s two most important markets, have reined in their purchasing.
Chinese consumers are saving rather than spending because the value of their homes is falling. Lower-income and middle-income Americans who developed a taste for luxury during the pandemic have pulled back sharply as they have burned through excess savings.
Now, wealthy consumers, too, seem to be getting choosier about which brands they will and won’t buy. Hermès Chief Executive Axel Dumas said there is a “flight to quality” under way in the luxury industry. This shift is benefiting the Birkin handbag maker , which has a reputation for timeless designs.
Chinese buyers in particular are avoiding flashy and logo-heavy brands as worries about the country’s economy and real-estate challenges grow.
Jewellery sales are also holding up as shoppers look for goods that are more likely to hold their value than clothing or handbags. Cartier’s owner Richemont said its jewellery sales rose 4% in the quarter, although the company’s overall sales were weighed down by weak demand for its watch and fashion brands. Kering jewellery labels Boucheron and Pomellato were rare bright spots in its portfolio.
The outlook is harsh for brands such as Gucci and Burberry that are in turnaround mode. The latter issued a profit warning earlier this month and replaced its CEO in an admission that a years-long push to make the British trench-coat maker more exclusive had failed. Its shares have fallen to levels not seen since 2010.
Both brands face an uphill battle to lure shoppers. Neither Gucci nor Burberry is known for the classic designs now in vogue. The labels might also have exacerbated the slump, as the sharp price increases that luxury brands implemented in recent years have sidelined aspirational shoppers.
Luxury stocks are diverging. Shares in Richemont and Hermès have gained 15% and 8% respectively so far this year, with everyone else in the red.
Investors are taking their cue from wealthy shoppers: In troubled times, the most exclusive brands are the safest bet.
Copyright 2020, Dow Jones & Company, Inc. All Rights Reserved Worldwide. LEARN MORE
The Australian leather house has opened an immersive four-day pop-up in Manhattan, unveiling its Bloom Collection and redefining what a product launch can look like.
Following the successful launch of its Palais Collection, MAISON de SABRÉ has unveiled a new modular handbag system offering more than 720 styling combinations.
Wall Street’s hottest momentum trade has reversed sharply, as former winners tumble and heavily shorted stocks surge.
3 min
Wall Street’s hottest trade has gone ice cold.
For years, it paid off to buy stocks that were rising in price—and bet against struggling shares. The momentum trade was especially profitable this year, as investors piled into hot stocks including Micron Technology, Nvidia, Advanced Micro Devices and other artificial-intelligence darlings while wagering against those likely to be hurt by the embrace of AI.
The S&P 500 Momentum Index soared 44% in the second quarter, its best quarterly performance on record, and it surged 133% over the past five years, nearly double the broad market’s performance.
Mega funds and rookie investors alike piled into the trade, some using leverage and options contracts in an effort to amplify their returns, propelling the underlying shares higher.
“It is a self-fulfilling prophecy,” said Matthew Tym, managing director at Cantor Fitzgerald, of the trade.
Suddenly, the trade is a loser. The momentum index has tumbled more than 9% since July 1, lagging behind the S&P 500’s 2.8% gain. The index—which tracks stocks in the S&P 500 based on a “momentum score”—is on track for the biggest quarterly underperformance in 25 years. July was the second-worst month for the momentum trade in around 40 years, according to Bank of America estimates; the only month worse was April 2009, in the teeth of the global financial crisis.
Hedge funds that bought momentum shares while shorting low-momentum stocks suffered even more. At the same time, a basket of the most popular stocks held by hedge funds tracked by Goldman Sachs recorded its biggest one-month underperformance in July relative to the S&P 500 in more than 20 years, according to the bank’s analysts.
Momentum trading is based on a rather simple observation: Investments that go up tend to keep outperforming; those that underperform often remain laggards. This kind of trading might seem too simple a stock-picking strategy to work. Yet it often has.
“For decades, it didn’t take a lot of sophistication to run a momentum strategy and make a decent living at it,” says Agustin Lebron, senior researcher at EquiLibre, a trading firm.
Part of the reason: It takes a while for corporate and other information to spread to various investors, so they slowly build positions, producing buying momentum.
“A huge pension fund can’t flip around its positions in a day,” says Lebron. “Behavioral biases also account for some of the effect, as well—people tend to sell their winners too early and hold losers too long.”
Fans of the strategy point to the human tendency to extrapolate from past results—and chase investment returns—noting that momentum patterns have been evident in markets for decades, even centuries. They also say that some of the worst months for momentum strategies are during longer periods of outperformance.
Some have been doing the trade by buying the strongest investments in a sector while shorting the weakest; others lean in to rising markets or asset classes. Still others use a quantitative approach or turn to banks or others who sell ways to make distinct wagers on momentum as a “tradable factor” or a “thematic basket.”
The fans remain believers. “Any strategy has disappointing periods,” says Antti Ilmanen, global co-head of the portfolio solutions group at AQR Capital Management.
The surge in Moderna and other biotech stocks helped crush the momentum trade. These shares were among the most heavily shorted in recent years, but positive news on a cancer vaccine from Moderna and Merck sent those stocks flying, crushing some quant and other hedge funds. Moderna is up around 150% so far this month.
These traders had an especially rough day on Aug. 19, which Goldman Sachs told its clients was the worst day for “systematic long-short managers” in more than two years. About half of the losses were because of momentum trades, the bank said.
Some traders have begun to short, or bet against, the very stocks that propelled the momentum trade earlier this year. Net short positions in futures tied to the Nasdaq-100 index among speculators recently climbed to some of the highest levels of the past two decades, according to data from the Commodity Futures Trading Commission.
The about-face is a sign of how markets have become more treacherous for investors, even as indexes keep climbing. Part of the issue: the recent meltdown of Situational Awareness, a hedge fund that had piled into some of the most popular momentum shares, including chip stocks. After a period of market tumult, Nvidia shares rocketed almost 9% after its earnings, showing how quickly sentiment can shift.
Some investors say the run-up in share prices driving tech stocks higher reminds them at times of the dot-com frenzy decades ago.
Mike Ogborne, the founder of San Francisco-based Ogborne Capital Management, said he has grown more cautious on technology stocks and is keeping more of his portfolio in cash than he typically does.
And he is nervous about the surge in spending by technology giants and quarterly capital expenditures that keep rising.
“It is a little bit like Cinderella and the clock striking midnight. You don’t know when midnight is going to come around,” Ogborne said. “They don’t send a memo around telling you when the capex cycle is over.”
