Happy Holidays from Dominion, see you in the New Year
As an eventful year draws to a close, Dominion is winding down its newsfeed – so welcome to our last day of reporting in 2018. Before closing the door on a year that’s been marked by geopolitical disruptions from trade wars to Brexit negotiations and more, we wanted to offer a brief retrospective of our story so far.
Luxury recovery imperilled by concerns over Chinese demand – although results disagree
When it comes to luxury, the overwhelming story in the latter part of 2018 has been around the impacts of a trade war between the US and China. Chinese demand is the sector’s most compelling growth driver, and Chinese consumers accounted for about 32% of all luxury spending this year according to researchers at Bain & Company. By 2025, the same researchers say that figure will have risen to 45%. So it’s understandable that tariffs at the Chinese border – and questions in the media about the health of the Chinese economy more generally – are causing a drag on luxury investors in the west.
Just a few weeks ago, we reported that Macau’s gaming sector had logged its 28th consecutive month of positive monthly comparison (see here). In November, Remy Cointreau noted that continued demand from Chinese consumers had bolstered its latest quarterly results (see here). In October, luxury giant Kering told a similar story (see here). A slew of other big brands concurred.
It is worth, in regards to this turbulent geopolitical background, reiterating a point made by Dominion’s chief investment officer, Arjen Los, in his most recent Economic Outlook:
“During November the Fund’s exposure to Tier 1 Traditional luxury companies was increased – in particular Kering, which had been unduly marked down on subsequently unsubstantiated media reports, which had suggested that Asian luxury demand is primarily cyclically/politically driven. Recent results from Hermes, LVMH and Kering (Gucci), clearly show that underlying demand remains robust and driven by long term structural trends.”
Ecommerce gets caught in a tech backlash – but some companies weather it better than others
Source: Yahoo Finance
2018 has witnessed a tech backlash, as the public fell out of love with stocks like Facebook, Alphabet, and other Big Tech players. Arguably, the “kick-off” point for this reversal of public sentiment occurred when the news broke about Facebook’s Cambridge Analytica scandal – but since then, the flames have been fed by a number of other negative headlines: Alphabet being fined by the EU, Silicon Valley’s struggles in regards to the imposition of EU’s GDPR regulations in May, Amazon underpaying its workers, and more.
However, there are two things to note about these stories: the first is that most of the big problems are already fixed. Amazon has instantiated a living wage; Alphabet has paid its EU fine without difficulty or (it appears) any real impact. The second is that the numbers these companies reported in the last bout of quarterly reporting remain staggeringly strong. You only have to look at the reports from the west’s ecommerce weekend (Thanksgiving through Cyber Monday – see here), or China’s Single’s Day (see here) to see that the trend is still the most disruptive one in the world.
Negative sentiment weighs down markets – is it justified?
Source: Yahoo Finance
Worries over the Chinese economy and the trade war with the US, as well as the tech backlash, and wider concerns over geopolitical instability, have conspired to weigh on markets, with a number of commentators offering gloomy predictions about the near future of the global economy. Setting aside the specifics dealt with in the sections above, the overruling question in regard to these predictions is this: how likely is it that the world is heading towards a crisis?
At the beginning of this month, Dominion Investment Manager Christian Cole tackled this very question. The entire piece is worth reading (and can be found here) but for now, we’ll repeat his concluding sentence: “Today the US economy is much larger than it was in 2008, household debt levels are much lower relative to GDP and savings rates are higher. This would indicate the risk of a consumer debt-induced crisis like 2008 is much lower today.”
With that said, all that’s left is to wish all of Dominion’s investors and their families a fantastic holiday season. We’ll be back next year, resuming our normal reporting service on 2 January.
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