November 2022
Insights
The Good: Resilient Luxury
Given the current uncertain economic conditions one would be forgiven for thinking that spending on luxury goods has come shooting down. The opposite is in fact true as the global luxury goods market has been powering through and is expected reach sales of $1.4 trillion in 2022, a 21% rise over 2021. All luxury categories have now recovered to 2019 levels or better, with hard luxury, apparel and leather leading the resurgence following the pandemic. Even in the face of recessionary conditions expected across leading economies into 2023, analysts are forecasting further expansion in sales and market value through the coming year.
Source: iStock, 2022
What this indicates is despite gloomy economic forecasts, people are still spending! Although the wealthy people buying these luxury goods are far more resilient than your average consumer, confidence in overall customer health can be garnered from Visa’s monthly metrics from October. These metrics detailed how global processed transitions have increased 40% from October 2019, while cross border transactions have increased 37% over the same period. This points to a stronger-than-expected consumer who is willing to travel and spend, despite rampant inflation.
The beneficiaries of this spending obviously include luxury good holding companies, such as LVMH, Kering and Richemont. Richemont reported robust first-half earnings in the month, with double digit growth across all segments. This saw the share move up over 10%. The company is a core holding in the High Street Local Balanced Fund as it is listed locally but over 90% of group revenue comes from non-Africa geographies. This is key to minimizing the South African specific risk and achieving the desired high Rand-hedge exposure of the Fund.
The Bad: FTX scandal
Cryptocurrencies have been a consistent headline story in the last decade. The largely unregulated, highly speculative assets have created millionaires out of nowhere, whilst hurting speculators who have got caught up in the excitement and got their timing wrong. The latest scandal involving Sam Bankman-Fried (SBF) and his FTX exchange, which until a couple of weeks ago was one of the biggest crypto exchanges in the world, is the most recent twist in the captivating tale that is the crypto world.
Source: Coinx3
Over the last few years, SBF had gained international acclaim after painting himself as an altruist, giving to others and ultimately trying to do what is best for the “crypto community” at large. In November, however, this narrative changed, with SBF facing allegations of fraud as billions of dollars seemed to go missing from client accounts. This started a spiral of events which ultimately revealed that FTX had lent $10bn of client funds to Alameda Research, an SBF-owned crypto trading firm. After facing a liquidity crunch as crypto markets tanked, Alameda and FTX were forced to file for bankruptcy, taking client funds down with them. In just a week, FTX went from being a multi-billion-dollar company to owing creditors over $3bn and being worth close to nothing.
In the months to come we will learn more about what actually happened at FTX but there is no question that the events have done major damage to the reputation of the industry. Greater transparency, potentially through regulation, is needed if we are to view these “currencies” as an asset-class for investment, and not merely speculation.
& China’s Boiling Point
After facing a potential fourth consecutive year of harsh and disruptive pandemic measures, demonstrations have erupted across major cities in China, including the capital Beijing and financial hub of Shanghai. The pushback against stringent testing and quarantine requirements has also transformed into widespread disdain for President Xi Jinping and the ruling Chinese Communist Party, with blank sheets of paper becoming a symbol for public defiance and protest of government censorship.
Source: The New York Times
Simultaneously, the number of COVID cases in China continue to soar to all-time highs which contributes to investor anxiety surrounding the lack of additional support for China’s economy. Investor confidence has been battered again this year, and many were hoping for a China re-opening as part of a bullish year-end narrative. However, the recent unrest has given investors an indication that the road won’t be smooth whatever the direction of travel is on zero-COVID, and that it has certainly reached its tipping point.
At the beginning of 2022, High Street was heavily invested in China across our Funds. However, we took a strategic decision to begin reducing this exposure in the first quarter and eventually completed our exit in the third quarter. While we realise there could be the potential for a significant rerating of asset prices in the event of a change in regulatory policy, we would rather participate from the sidelines given the massive macro and political uncertainty that is unfolding under President Xi.
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